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Ryanair downgraded by HSBC after airline posts lowest profit in four years

HSBC cut its rating on the airline to ‘reduce’ from ‘hold’ and lowered its target price to €9.4 from €12
Ryanair
HSBC said Ryanair's €700mln share buyback will exceed free cash flow

Ryanair Holdings PLC (LON:RYA) shares drifted lower as HSBC downgraded its recommendation on the stock after the airline reported its lowest profit in four years.   

The Irish carrier on Monday posted a profit after tax of €885mln for the year to March 31, down from €1.45bn last year.

It blamed the profit slump on the need to charge lower fares to attract customers amid Brexit uncertainty and tough competition and fierce competition in Europe.

READ: Ryanair nosedives as it predicts flat profits for 2020

Ryanair said it was “cautious” on pricing going into the new fiscal year and predicted net profits of €750mln to €950mln for the year to March 2020.

HSBC cut its rating on the airline to ‘reduce’ from ‘hold’ and lowered its target price to €9.4 from €12, saying the results were 4.5% below its estimates.

“Trading in the March quarter was evidently very weak, impacted by high industry capacity growth, the loss of Easter and weakening demand,” the bank said.

Higher costs weigh 

HSBC pointed out the Ryanair has guided towards a €460mln increase in fuel costs in the year ahead and non-fuel costs will rise 2%.

The bank also thinks Ryanair’s dispute with unions over pilot pay remains “far from equilibrium” and delays to 737 Max aircraft deliveries “complicate planning”.

“Once delivered, the risk of weak consumer confidence should not be ruled out,” HSBC said.

“Ryanair’s growth in FY20 is heavily weighted to Lauda, the lowest margin business in the group.”

“In common with other airlines, Ryanair is vulnerable to macro uncertainties relating to Brexit, weakening European economies and increasing environmental sensitivity.”

Share buyback will exceed free cash flow

A day after the results, Ryanair announced a €700mln share buyback scheme.

HSBC said the share buyback will exceed free cash flow, effectively making the buyback an equity for debt swap.

“Historically, Ryanair has attracted investors with its strong free cash flows,” it said.

“With capital expenditure building for the coming three years as the Max deliveries commence (on our assumptions), and profits troughing, we forecast Ryanair’s free cash flow to fall.”

It expects negative free cash flow in fiscal years 2021 and 2022.

Shares dropped 2.5% to €10.18 each in late morning trading.

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