Action taken by management should allow the group to endure, but could see them post losses over £185 million
easyJet shares up 10% despite grounding of fleet
- Despite planes being grounded for final month, group posted strong revenues to the six months ending in March – 1.6% higher than last year
- The first half reported loss before tax is expected to be in the range of £360m to £380m, including the impact of £175m-185m in relation to the over-hedging of fuel and FX
- However, action taken by Management such as taking on loans, should enable it to endure prolonged grounding of flights
- Recommendation: Given that we are about to have the sharpest reduction in activity, we would be very hesitant to buy the shares given the heightened risk and maintain our ‘Hold’ recommendation
Investors have been given some much needed reassurance by easyJet this morning, giving the shares almost a 10% lift at the open. However, the key issue of when flights can resume remains. While out of its control, measures that Management have taken should see the company be able to endure prolonged grounding of flights – the most extreme being a situation where flights are grounded for nine months, potentially seeing the group burn through £3bn in cash.
The carrier is demonstrating its survivability to investors in these extreme circumstances and we’re somewhat assured that it’s a more viable airline than most others. However, despite this morning’s rally in the shares, it’s still a long way off for the pre-lockdown levels. While, it should come out relatively well on the other side compared to others, the question is how the economy shapes up afterwards and whether spending on travel resumes to pre-lockdown levels or not. Given that we are about to have the sharpest reduction in activity since the great depression with unemployment set to soar, we’d be very hesitant to buy the shares given the heightened risk. Of course, they remain an option for the very brave.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.