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Ryanair shares could find a floor in March

Ryanair’s warnings that market forecasts might need toning down are becoming routine.

Shares still heavy

Typically, under such circumstances, the extent of a share price’s reaction to similar repeated stimuli tends to diminish over time. No such investor acclimatisation appears to be happening with Ryanair shares. The stock has slumped at least 3%-4% on the day of recent cautions like its second profit warning in three months a few weeks ago. The stock has also fallen as much as 5% on Monday, when the group flagged that a third downgrade can’t be ruled out. If recent history is a guide, the stock will extend losses in coming days. After more than three months of warnings, sensitive stock price reactions belie the assumption that reduced expectations might be almost priced in by now. On the contrary, another assumption is in play: that the extent to which further downside to forecasts can be predicted is limited. Little wonder, given that the group is dealing with unresolved issues on a number of fronts, like a hiatus in pay talks with pilot unions in some countries.

Ryanair: what we know

But much of the outlook for the year actually is known. True, Ryanair has signalled it can’t guarantee it won’t cut an already reduced forecast of after-tax profit of between €1bn and €1.1bn in the year to the end of March. Yet it’s worth noting RYA’s operating margin leadership has stood the test of time. It has trended above the European airline average for years. An average forecast of 13.6% in 2019 is almost double easyJet’s. Free cash flow generation follows a similar pattern and compares to current cash flow losses at easyJet. At the same time Ryanair passengers should rise 9% to around 140 million in FY18/19, keeping the bias for ‘ancillary’ earnings (reserved seating, priority booking, meals and more) on the high side of forecasts.

Near lockstep

That leaves Brexit-driven uncertainty as possibly the key reason for overarching share price pressure. Since early June 2018, when Ryanair recognised its first cabin crew union, its stock has slumped about 34%. EasyJet, which has managed investor expectations better, has still fallen a similar amount, losing some 28%. TUI, which operates flights over similar routes to the pair from the UK and Ireland, is down 34%. (See normalised share price chart below). The fear that a hard Brexit could, at worst, ground fights and slash demand, is front of mind for investors. As such, greater certainty in Ryanair’s individual outlook would help its shares. But expect the stock to keep trending lower so long as Brexit and attendant uncertainties remain. On a relative basis though, the stock should also begin to build a floor if signs of stability appear into Ryanair’s full-year results in March.

Normalised share price chart: Ryanair, easyJet, Air France-KLM, Deutsche Lufthansa 04/02/2019-04/02/2019 15:06:38

Source: Refinitiv/City Index

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