Flybe shares slid by 25% after a profits warning on 5 May. This was triggered by high jet fuel prices and a slowdown in leisure travel in February and March. But I think that this British no-frills airline is a value play.
Firstly, overall trading was nowhere near as bleak as the sell-off suggests. In fact, even though the load factor (a measure of how full its 68 planes are) fell by 4.4% for the three months to March, revenue per seat rose by 2.2% to £46.14. Better still, passenger yields remained strong (up 10.5%), thanks to robust business demand, and ticket sales for the summer season were ahead by 5.4%.
Secondly, given the strength of its brand, this budget carrier should continue to win market share as travellers are migrating to larger carriers such as Flybe to avoid small operators that might go bust.
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Thirdly, the board is already working hard to mitigate the impact of higher crude oil costs. A new £3 oil surcharge is being introduced for flights from 1 September and 69% of fuel requirements have been hedged for the next 12 months.
Flybe (LSE: FLYB)
Corporations are increasingly choosing Flybe's short-haul flights, with business travel now accounting for 45% of all passengers. Joint house-broker Investec is forecasting 2011/2012 revenues and underlying earnings per share of £630m and 22.9p respectively, rising to £668m and 29.2p for 2012/2013.
Using those figures, the stock trades on skinny p/e ratios of 7.7 and 6.0. It also has net cash of £21.9m after raising £66m at 295p from its flotation in December.
On this basis, I would rate the group on a 12 times multiple giving an intrinsic worth of around 270p per share. What are the possible headwinds? The biggest threat is a further oil spike, say due to the Middle East crisis albeit in this event I'm sure fares would rise across the patch to offset any hit.
Another concern is a prolonged double-dip recession in Britain, causing some people to stay at home. Finally, there are the usual worries of foreign-exchange issues, departure taxes, air-traffic-controller strikes, volcanic ash clouds, terrorism and accidents.
On the other hand, with such a compelling low-cost proposition, Flybe appears to be in good shape to weather any protracted storm. Preliminary results are scheduled for 30 June.
Recommendation:SPECULATIVE BUY at 180p
(market cap £133m)
