12/14/2012
Team AC19
BUSINESS VALUATION & ANALYSIS
Andreea Negoiţă 377758 Andrei Iorgulescu 377092 Anna Karousioti 371892 Dana Ion 375621
ROTTERDAM SCHOOL OF MANAGEMENT ERASMUS UNIVERISITY
Contents Industry analysis ......................................................................................................................................................... 2 Rivalry among existing firms ..................................................................................................................................... 2 Threat of new entrants ............................................................................................................................................. 2 Threat of substitute products ................................................................................................................................... 2 The bargaining power of buyers ............................................................................................................................... 2 The bargaining power of suppliers ........................................................................................................................... 3 Competitive analysis .................................................................................................................................................... 3 Corporate Strategy Analysis ........................................................................................................................................ 4 Accounting Analysis ..................................................................................................................................................... 5 Implementing accounting analysis ........................................................................................................................... 6 Depreciation adjustment ...................................................................................................................................... 6 Operating lease adjustment ................................................................................................................................. 7 Recycling of gains and losses ................................................................................................................................ 7 Other adjustments ................................................................................................................................................ 7 Financial Analysis ......................................................................................................................................................... 8 Alternative decomposition of ROE ........................................................................................................................... 8 Operating Management ........................................................................................................................................... 8 Investment Management ....................................................................................................................................... 10 Financial Management ........................................................................................................................................... 10 Prospective analysis ................................................................................................................................................... 11 Appendices ................................................................................................................................................................. 13 Appendix I: Company Internal & External Analysis .................................................................................................... 14 Appendix II: Accounting Adjustments......................................................................................................................... 13 Appendix III: Financial Statements ......................................................................................................................... 2013 Appendix IV: Ryanair Ratio Analysis and EasyJet Benchmarking................................................................................ 25 Appendix V: Forecasts ................................................................................................................................................ 28 Appendix VI: Data for Beta Estimation ....................................................................................................................... 34 Appendix VII: European Debt Ratings Prediction Model ............................................................................................ 35 Appendix VIII: Valuation Multiples ............................................................................................................................. 34 References .................................................................................................................................................................. 35
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Industry analysis The low-cost airline industry can be classified as a strongly competitive market. The European market started to develop in the early 1990's, when the cost airline industry consists of 30 budget carriers, among them Ryanair and easyJet being the bigger competitors (Wikipedia).airline deregulation process was enforced, and registered a constant growth since then. Nowadays, the lowRivalry among existing firms The intensity of competition is high in the low-cost carriers industry due to numerous elements. The industry growth rate is lower than in other sectors; therefore, existing companies can survive only by taking share away from other players (Palepu, Healy, & Peek, 2010). Furthermore, low differentiation in provided services and low switching costs determines the price-based competition among low-cost carriers. Other influential factors could be represented by diverse competitors and high exit barriers. Threat of new entrants Although this industry may seem impervious, latest changes made it more attractive to new entrants. Firstly, future carriers have now easy access to capital through bank credits or loans, making the entrance to this high leveraged market less difficult. Moreover, aircrafts can be leased or even purchased cheaper from airlines which want to dispose of excess capacity. However, having a good reputation and good slots on airports can lower the threat of new competitors. Therefore, we can conclude that the threat of new entrants in the low-cost carriers industry is medium. Threat of substitute products Substitute products for airlines are represented by other means of transport such as cars, trains and ships. There might be a fierce competition over short distances but for long distances, when time and money matter, low-cost airlines have a huge competitive advantage. There is, however, a not fully exploited network of high speed trains that might threat the airlines in the future. As a result, we can conclude that the threat of substitute products is moderate. The bargaining power of buyers In the low-cost and no-frills airline industry the bargaining power of customers is high as long as the other budget competitors use the same routes. On-line ticket purchase played a significant role as buyers gained more power because of the easy access on web booking systems of each airline that helped them compare
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prices among different carriers. In this situation customers will choose the cheapest ticket, which decreased their power of bargaining.
The bargaining power of suppliers The power of suppliers is high as airlines’ primary costs for their flight operations are airport fees and handling charges, aircraft maintenance, fuel and labor. The cost of fuel, however, depends on the efficiency of the carrier, hedging policies and international oil prices. It is important to mention that the greatest fuel consumption is due to aircrafts’ take-offs and landings, which implies that the short haul airlines have lower cost efficiency. Another major issue is that the prices of jet fuel experience variances frequently so companies need to engage in contracts that will provide protection against these fluctuations. When it comes to aircrafts there are two main manufacturers, Boeing and Airbus, which limits airlines’ bargaining power in aircraft purchasing or leasing thus creating a restricted oligopoly. The likelihood of those two suppliers creating their own airlines is however, low. Considering the costs of technical support and maintenance, budget airlines wisely choose to have one or two models of aircrafts to reduce these expenses. In conclusion, the two most important forces that shape the airline industry are the threat of competitive rivalry and the bargaining power of suppliers. Competition is high because of the industry fragmentation. The high number of players means that Ryanair can compete directly both with other low cost airlines and with full-service airlines. As for the bargaining power of suppliers, it mainly results from the high dependence of airlines on fuel.
Competitive analysis Ryanair strives for operational efficiency and price leadership focusing on very cheap tickets, on time flights and fewer lost bags. For the past twenty years, Ryanair dealt with, and overcome competition due to its aggressive price policy. For example, when they choose same routes as other carriers they charge lower prices in order to force the competitors to step back. Apart from the cheap tickets, the company relies on ancillary services, such as: car rentals, hotel bookings as well as on board sales (food, beverages) to generate additional income. In addition cabin crews are responsible for sales on board, for which they can earn commissions based on their sales volume. While these commissions have an upward limit they provide incentives for the crew to generate additional revenue (Air Scoop, 2011). 3
Ryanair achieved a competitive advantage through cost leadership also based on the low maintenance costs of its aircrafts (Morrison, 2006). Unlike competition, its aircrafts have an average age of around 4 years, a greater capacity and they are more fuel-efficient (e.g. pilots are to load airplane tanks with only the minimum required fuel for each flight to reduce weight) (AirScoop, 2011). Moreover, management believes that contracting third parties for aircraft and baggage handling is more cost efficient, hence the company outsourced these functions at certain airports (Ryanair, 2011). Furthermore, most of these airports are secondary ones and are willing to pay millions of euros in subsidies to attract popular airlines such as Ryanair, in order to stay profitable (Air Scoop, 2011). Further on we analyze the sustainability of such strategy and we reach to the conclusion that on the short term the company can keep its competitive advantage primarily due to its large size which allowed it to acquire a high market share (Ryanair offers flight on more than 1500 routes). On the long term and presuming that other companies can buy a similar number of planes and offer flights to a comparable number of destinations, this low-cost strategy makes Ryanair vulnerable because there are no barriers which can stop new entrants from operating in the market and employing similar low cost strategies. Regarding the company’s ability to address industry changes, we could express our concern only if European regulation dramatically modifies the technical requirements for aircrafts, but this is highly unlikely because the set of provisions is extensive and long-time tested.
Corporate Strategy Analysis Since its establishment in 1984, and after it went public in 1997, Ryanair has grown rapidly from a small airline into one of Europe's largest carriers, posing now a serious threat to the dominance of not only leading European budget airlines, but also to other major carriers like Lufthansa, British Airways and Air France. The primary reason that Ryanair ranks first in profitability among the other low-cost airlines is due to its competitive strategy and ancillary revenue generation. Unlike its main competitor EasyJet, which has diversified its operations to unrelated businesses, Ryanair is following a different policy to create value at a corporate level. Some information on Ryanair’s structure and links between the parent company, Ryanair Holdings Plc, and its subsidiaries is direct, by way of shareholding and direct investment, while other information is less visible. Ryanair Holding’s subsidiary, Ryanair Ltd, serves as a critical link for the various investments 4
and subsidiaries Ryanair possesses. The main subsidiary company, owns several subdivisions such as Aviation Leasing Ltd, Coinside Ltd, and a minority share in Aer Lingus Group Plc. Most of the subsidiaries are dedicated to reinvesting Ryanair’s cash, managing marketing subsidies (from airports) or aircraft leases through sale and lease-back operations. For instance, a substantial part of the company’s aircraft fleet is placed under finance or operating leases which allows the company to keep these assets and the liabilities associated with them off balance sheet. To minimize any transaction costs occurred by aircraft maintenance, Ryanair carries out most of all the routine maintenance procedures its aircrafts need. Yet, the company is still unable to perform some of its heavy maintenance in-house and relies on external contractors with which it enters into short-term contracts. Some of its maintenance facilities do not actually provide “in-house” maintenance; technicians are employed by a third-party provider belonging to Ryanair. For example, at Stansted airport all maintenance accomplished for Ryanair is operated by a company called Stansted Aircraft Maintenance Systems Ltd. which is a British company but positions are advertised and filled through Ryanair. It is the company’s strategy to create Ryanair-dedicated subsidiaries employing lower-paid employees to lower its costs. In addition to this, Ryanair generates significant value from website traffic monetization to partners; from car hires, to insurance and house rental. Ryanair’s website focuses on sources of ancillary revenues by advertising its partners’ offers on its website homepage. The main goal of the company is to put aside all intermediaries and to focus mostly on direct transactions with its clients. Ryanair’s financial structure is complex with the Ryanair Holdings plc publishing the annual report and the subsidiaries (Ryanair Ltd and its own subsidiaries) in charge of operations. Changes in the airport subsidies scheme or in the employee contract localization could seriously affect Ryanair’s numbers and destabilize the company. Its profitability might not be as high and it would both impact the firm’s future development and the firm’s value to shareholders. In any case, Ryanair remains consistently among the lowest priced low-cost airlines, while simultaneously showing high operating margins demonstrating the efficiency of the management in reducing operating costs and generating additional revenues and maintains its capacity to systematically undercut competitors with its promotional offers.
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Accounting Analysis The key accounting policies are related to the long lived assets, as plant and property represent approximately 50 percent of total assets and more than 95% of non-current ones. The long lived assets are almost completely represented by the 272 aircrafts, out of which 51 are acquired by leasing so a crucial factor for the company is to ensure that their residual values and their expected useful lives are estimated accurately at the end of the contract. Aircraft are depreciated over a useful life of 23 years from the date of manufacture to residual value which is estimated at 15% of the market initial value, based on its own and industry experience, recommendations from Boeing, the manufacturer of all of the Company’s aircraft and other available marketplace information. Consequently, managers might have been motivated to report higher lease expenses which could have decreased profits for fiscal years, or they could have extended assets’ live in order to report current higher earnings which in turn lead to higher current bonuses. Given the company’s profile, the only element which could have indicated an inflexible accounting policy was marketing outlays, but the value of €3 mil. poses no considerable threat of distorting the financial statements. Despite fierce competition in the airline industry Ryanair was never exposed to takeovers, nor has it drastically changed its policies along the years. The only modification occurred in 2010 was applying IFRS 3 Business Combinations (2008) in accounting for business combinations, but it had no major impact on the company as there were no aquisitions As mentioned before, a source of concern regarding the accounting strategy was the lease and depreciation policy, but we performed adjustments to counteract potential distortions. The quality of disclosure is highly satisfactory as the company publishes every year an audited financial report which includes extensive notes correlating certain accounting policies to Ryanair’s strategy as well as sections which explain its poor performance (e.g. Icelandic ash cloud caused losses of about €12.4 mil. in 2011). The above mentioned report includes considerable information for investors: strategy, current performance, projected activities and management contacts.
Implementing accounting analysis Depreciation adjustment As an asset intensive business, Ryanair operated 272 aircraft in 2011 of which 50 were leased both under finance and operating leases, therefore its depreciation policy bears a significant influence on the 6
company’s financial statements. Ryanair’s current depreciation policy regarding aircrafts implies an average lifetime of 23 years (common on most airlines) and a 15% residual value on the market value of its planes determined each year. To remove management bias in the valuation of residual value, and simplify comparison of financial statements with its main rival EasyJet, a depreciation adjustment was performed based on EasyJet’s numbers: residual value 12% of cost, depreciation rate of 3.8%. The overall result was an increase in assets due to a lower depreciation rate, a decrease in depreciation expense, and an increase in net profits, detailed results can be viewed in Appendix II, Table 2.
Operating lease adjustment As previously mentioned, the company relies on sale and lease-back transactions in order to keep some of its planes off balance sheet. Adjustments were made to the operating leases, and the present value of these contracts was capitalized. As a result net non-current assets increased by 222.8, 285.6 and 415.5 million euro in 2009 to 2011 respectively. This increase was offset by a recognized debt liability equal to the value of the increased assets. An assumption was made regarding the depreciation expense. Detailed computations can be viewed in Appendix II, Table 1. Recycling of gains and losses In order to prevent the ‘recycling’ to profit the unrealized fair value gains or losses resulted after the sale of financial assets, once labeled as ‘available for sale’, and given the fact that this unrealized value ranged between €36 millions and -€49 millions1 we decided to transfer current year’s revaluation to net income. The adjustment lead to a decrease in unrealized revaluations which in turn triggered a reversion in profits, the most notable changes being in 2010 (36 million increase in 2010, 10% of initial profits) and in 2008 (48.9 mil decrease, -10% of initial profits) (Appendix II, Table 3) Other adjustments Other adjustments were considered but did not prove to have a significant material effect; the following paragraph explains the reasoning behind our assumptions. Adjustments to trade receivable were not needed as these assets represent less than 1% of sales in 2011, showing the high liquidity of the business. In the period analyzed the company incurred no R&D expenses. In terms of its pension liability, Ryanair offers such benefits only to a relative small number of pilots; the costs arising in respect to pension
1
Consolidated Statement of Comprehensive Income, page 130 Annual Report 2011
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schemes are charged to the income statement in the period in which they are incurred. Any contributions unpaid at the balance sheet date are included as a liability. Actuarial gains (losses) recorded in the comprehensive income statement are not substantial (5.7 million euro in 2011).
Financial Analysis Alternative decomposition of ROE In the period analyzed Rynair managed to return to profitability, after witnessing an atypical unprofitable year in an otherwise sustained growth (alternative decomposition of ROE can be viewed in the table below), the causes of the negative Return on Equity will be further analyzed. Ryanair’s ROE increased from -3.24% in 2009 to 12.94% in 2010, mainly due to an increase in profit margins and a positive financial leverage gain. In 2011, the company stabilized, and obtained a ROE similar to the previous year with only a minor increase due mostly to spread, as Nopat margins actually decreased from 15.44% to 14.17%. The company’s financial leverage gradually increased from 0.18 in 2009 to 0.19 in 2010, registering a spike in 2011 to 0.39, and as a result of the positive spread in 2010 (0.77) and 2011 (4.4%) financial leverage gain had a relatively small positive influence on the company’s ROE of 0.14% and 1.7% respectively, as opposed to the negative effect of financial leverage on ROE in 2009 of -2.84%, mostly due to a negative spread of -16.05%. The following analysis evaluates the performance of Ryanair between 2009 and 2011 and also benchmarks it against that of its main rival EasyJet. Ratio Net operating profit margin × Operating asset turnover = Operating ROA Spread × Financial leverage = Financial leverage gain ROE = Operating ROA + Financial leverage gain
2011 14.17% 0.83 11.76% 4.40% 0.39 1.70% 13.46%
2010 15.44% 0.83 12.80% 0.77% 0.19 0.14% 12.94%
2009 -0.43% 0.94 -0.40% -16.05% 0.18 -2.84% -3.24%
Operating Management In terms of operations Rynair managed to constantly increase its revenues between 2009 and 2011, as well as the number of passengers transported (Appendix I, Table 2), mainly due to its aggressive expansion strategy backed by an increased aicraft fleet. Analyzing the average price per fare (Appendix I, Graph 3), we notice that it decreased during 2010, which would explain the relative small increse in 8
scheduled revenues compared to the number of passengers tranported. The airline industry is particularly sensitive to price, and while Rynair average ticket priec is much lower than that of its rivals, future increases such as those in 2011 may have negative impact on demand. Rynair lists costs by nature, with one of the largest expense being Cost of materials in which fuel expenses are included The cost of fuel is a major determinant of the company’s profitability. This is most clear when we examine the years 2009 and 2010, when Cost of materials as percentage of sales decreased from 45% to 32.39% a drop of 344 mil euro which had a significant influence on the company’s net profits. In 2011 the Cost of materials increased to 36.39%, however profitability did not decrease due to cost reductions in other operating expense. Oil price volatility remains a significant threat to Ryan Air. Overall net operating expense follow a decreasing trend from 100.46% of sales in 2009 to 83.13% in 2010 and 84.06% in 2011 which compared with one of its competitors EasyJet ( 2011: 92.79%, 2010: 94.76%, 2009: 98.49%) appear to be much more volatile, mostly as a consequence of the cost of materials (oil prices) and an improper hedging policy in 2009. This decreasing trend can also be explained by a cost reduction program that began in 2009, where the company attempts to streamline its operations and further cut costs (examples include the elimination of check in offices). Personnel expenses as percentage of sales remain relatively stable throughout the years (average of 10.07%, which is lower than EasyJet’s average of 11.5%) in spite of Ryan Air’s considerable increases in the number of employees: 2009 (+1107), 2010 (+663), 2011 (1031). Similarly, the depreciation expense as percentage of sale suffers only minor variations and actually witnesses a decreasing trend from 2009 to 2011, once again in spite of the company’s aggressive aircraft purchase program: 40 new airplanes in 2011, 50 in 2010 and 18 in 2009. This results can be explained by the Sales revenues generated by company’s expanding business which increased by 23.36% from 2008 to 2011, meaning that increases in operating expenses are offset by additional revenues in each year. Other operating expenses regard in large proportion the Route Charges and Airport handling charges with marketing and distribution having a much lower economic importance (as a low cost company Ryan Air relies mostly on its website for publicity and bookings). As part of Ryan Air’s expansion policy the company opened 223 new routes in 2009, 284 new routes in 2010, and 328 routes in 2011, however the amount of sales revenue generated by the new business offsets any costs increase, furthermore due to a constant cost reducing policy, the company managed to decrease the proportion of these operating expenses in sales each year from a 2009 high of 37.39% to a 2011 low of 29.55%. Interest expenses remain constant throughout the three years, as the company has managed to fix its interest rates through derivative instruments. In terms of the tax 9
expense, which closely follows the profits before tax, the company paid similar amounts for 2010 and 2011 gaining tax benefits due to its loss in 2009. Ryanair’s Nopat margins follow a similar trend as ROE, showing that the operating performance of the company was negative in 2009 (-0.43%) followed by a high increase in 2010 to 15.44% and a stabilization in 2011 at 14.17%. The company appears to have significantly higher operations profitability as compared with EasyJet (7.18% 2011, 5.18% 2010, 2.05% 2009), however fluctuations in its expenses can lead to negative margins, showing that the company is more risky and sometimes more profitable. Investment Management Asset management ratios are intended to highlight how efficiently Ryanair’s assets are used for obtaining revenues. Due to different adjustments chosen it was fairly difficult to compare the company with EasyJet but if we use as a guideline the results provided by our colleague the British airline seems to manage better its assets. The company had a negative working capital, which is common in the airline industry as customers pay upfront long before their flights are scheduled. In absolute values the Operating working capital/Sales has slighly increased in 2010 compared to 2009 as a result of higher accrued expenses probably built up because the company needed more operating cash for purchasing 42 new aircrafts, but also due to an accumulation of interest for borrowed funds. In 2011 it followed a downturn of almost 10 pp due to higher revenues combined with a decrease of 100 mil. euros in working capital which derived mostly from diversifying the company's activities by investing in derivative instruments. A double amount compared to 2010(~338 vs ~122 mil. euro) was used for these instruments, therefore leaving less resources for operating working capital. Not surprisingly the company’s days receivables is very low averaging around 5 days, showing that the airline industry is highly liquid; on the other hand, Ryanair’s Days payables average for the analyzed period is 45 days, a lot lower than EasyJet’s 136 days which indicates that Ryanair’s management does not rely as much on trade credit as its main competitor In terms of its non-current assets management, which represent an important aspect of an airline’s analysis, Ryanair had an average non-current asset turnover of 0.65 almost half of that of EasyJet’s, a possible explanation for the lower efficiency is the high increase in no of aircraft for Ryanair, and the decision to ground up to 80 airplanes during winter to save profitability. Financial Management 10
Despite an increase in debt during the analyzed period the company maintains a relatively small net financial leverage reaching 0.39 in 2011 from a low of 0.18 in 2009. However Ryanair’s is a highly levered firm as its Financial leverage averages 2.72 in the period analyzed, the difference between the two values of leverage are given by the high amounts of cash that the company owns, which have increased from 2.2 billion in 2009 to almost 3 billion in 2011. The large cash balance along with a solid operating cash flow, ensures that Ryanair’s liquidity ratios are high and superior to those of Easyjet’s. In terms of its long term solvency, the company’s interest coverage ratios are relatively comfortable for 2010 and 2011, but lower and even negative for 2009 when the company registered a net loss. Taking everything into account the company had a negative Sustainable growth rate in 2009, but quickly recovered in 2010 as no dividend were paid during these 2 years, however in 2011 the company paid 500 mil in dividends and once again registered a negative sustainable growth rate.
Prospective analysis Given that the airline industry is a cyclical one, and that margins are highly dependent on oil price fluctuations, we opted for a 10 year forecast horizon, in our valuation of Ryanair, and in an attempt to smooth out potential shocks, after the terminal year we assume the industry growth rate to approach a steady state. Ryanair operates in an industry which is highly susceptible to macroeconomic trends; sales tend to contract during downturns and expand when the economy is flourishing. However, as Ryanair pursues a low-cost strategy company, price sensitive customers might prove an advantage for Ryanair as its lowest ticket prices therefore it might attract customer from other airline operators. Ryanair’s growth in the past has been fuelled by an expansion of its aircraft fleet, however, management has announced that negotiations for the purchase of future aircraft past 2013 have not been successful, thus we estimate that Ryanair will enter a post growth environment which will influence its sales growth and its operating margins. In forecasting sales growth we relied on macroeconomic estimates, average trends as well as the company’s past performance. Ryanair has been an outperformer in terms of sales growth mostly due to aggressive expansion and cost differentiation, however the company’s aircraft acquisition will end, with the last 10 airplanes expected to be purchased in 2012. We therefore estimate that high sales growth will only be maintained for the first two years of the forecast period at a rate of 15%-21% and then they will revert to the mean value, reaching in 2021 a terminal steady rate of 4%. The gradual decrease in sales growth is due to several factors including: additional competitors on the low cost market such as Hungarian Wizzair, Norwegian Air Shuttle (firm order of 222 airplanes in 2012); EU plans of further 11
developing high-speed railways and the EU-U.S. Open Skies Agreement, which allows U.S. carriers to offer services in the intra-EU market. Our estimates remain higher than the average European trends in part due to the revenue structure of Ryanair, where we expect the company to take advantage of its huge customer base to further increase its ancillary revenues. A detailed forecast of sales growth is available in Appendix V. In terms of the company’s NOPAT margin we estimate that it will follow a downward trend as a result of potential rising oil prices and to a less extent due to additional price wars on competing routes with other low cost carriers. NOPAT also decreases under the influence of rising costs for ageing fleet and accumulated personnel expenses lead by the company’s expansion. However, the decrease is less severe than that of the sales growth, as we believe that the company will mitigate effects of increased operational expenses by adjusting its ticket pricing. We believe that the company will be able to maintain its competitive advantage on the long term given its operating excellence and cost reduction policies, thus NOPAT margins will remain relatively high even in the terminal year (6.5%) as compared to those of other carriers (Appendix V). The operating asset turnover was closely linked to macroeconomic trends and subjected to similar adjustments as NOPAT because we presumed Ryanair’s decision of operating on new routes will lead to a better use of aircrafts. Furthermore, we assumed that past constant performance (operating turnover of 0.83-0.86) will serve as ground for similar evolution in the forecast period. The effect of our forecast is shown in the predicted financial statements in Appendix V. After the terminal year we presumed that all line items will be proportional to sales, which, as stated before, will record a rate of 4%. As previously mentioned we assume that the company will sustain its competitive advantage and earn abnormal returns also on incremental sales thus we have chosen the terminal value with ‘persistent abnormal performance and growth’ assumption. The cost of equity (9.93%) was calculated with CAPM model, where beta was expressed as a regression of stock prices against FTSE 100 index over the period 2nd of January 2008-30th of December 2011. We chose FTSE 100 as market index because the stock prices were recorded at London Stock Exchange, which due to a higher trading volume compared Dublin Stock Exchange seemed to offer data with more explanatory power.
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The expected market return for the European Airline Industry was according to Thomson One Banker 11.5%, and the risk-free interest rate was equal to the 10 year German treasury bonds (3.69%2), at 2008 level, which would allow us to eliminate the crisis effect which might have distorted the cost of capital by 0.5 percentage points. For estimating the cost of capital (9.78%) we used the existent cost of equity, the market value of equity which was equal to Ryanair’s capitalization at 26th of November 20123 and the debt based on a cost of 10.29%. The latter was based on the debt ratings prediction model for European company and revealed that Ryanair could be attributed a BBB rating (Appendix VII). Valuation – Equity value approach & multiples Ryanair’s total Equity value using both the Free Cash Flow model and Abnormal Earnings model, computed based on our forecasted financial statements and a cost of equity of 9.93% is 3.8677 billion euro corresponding to an Equity value per share of 2.8 euro. We chose equity valuation as we believe that the company’s debt will not drastically increase and as such will not have a significant effect on equity value. Our estimated value of the firm’s equity is below that observed on March 2011, with a market price per share of 3.5 euro and a market capitalization of 4.9 billion. Furthermore, Ryanair stock price has continued to increase and it is currently at 4.7 euro per share. We believe that the differences are due to Ryanair over performing in the airline industry as compared to its peers, showing a high profitability and a sales growth of over 20% in 2011 and 2012 in spite of long-lasting economic crisis effects, which has caused investors to be over optimistic. Furthermore, announcements of future dividends made my management as a result of decreasing CAPEX, have helped to further boost current share prices. Another possibility is that in our choice of a terminal value with persistent abnormal performance and growth, were too pessimistic in what regards the terminal values, thus the costs of capital slightly exceeds expected returns and has a negative effect on terminal values with the Abnormal Earnings model. Detailed computations can be viewed in Appendix V (Tables 2-5). We also employed multiples in the valuation of Ryanair’s equity. We computed average P/E and P/BV multiples for 5 other low-cost carriers operating on the European market ( Finair, Norwegian Air, EasyJet, SAS and Aer Lingus), obtaining a P/E ratio of 7.14 and a Price to Book Value of 0.99, which corresponded to an Equity value for Ryanair of 2.7 billion and 3 billion respectively. The estimation are particularly low due to large differences between the companies and the inherent flaws in using multiples valuation in the airline industry. Details of our computations can be viewed in Appendix VIII. 2
Damodaran, A., What is the riskfree rate? A Search for the Basic Building Block, page 15, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1317436, Market price €4.7, www.google.com/finance/historical?cid=6391824&startdate=Jan+11%2C+2011&enddate=Dec+31%2C+2012&num=30&ei=14vEULDqAeKGwAOa6gE 3
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Appendix I: Company Internal & External Analysis Table 1: Porter’s Five Forces
DEGREE OF ACTUAL AND POTENTIAL COMPETITION Rivalry among existing firms: high Undifferentiated product
Threat of new entrants: moderate Easy access to distribution channels
High exit barriers
Threat of substitute products: moderate High threat for short distances High switching costs for long distances
Low legal barriers Low switching costs Large first mover advantages Fragmented industry
High-speed train infrastructure development
High capital requirements
INDUSTRY PROFITABILITY BARGAINING POWER IN INPUT AND OUTPUT MARKETS Bargaining power of buyers: moderate Low switching costs
Bargaining power of suppliers: high
Large number of buyers
Small number of suppliers (Boeing & Airbus)
High bargaining power in shared routes
Discounts available only for large orders
Easy access to price information
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Table 2: Key Company Indicators Indicators Scheduled passengers Fleet at period end
2011 72.1 m
%Δ +8%
2010 66.5 m
%Δ +14%
2009 58.6 m
%Δ +15%
2008 50.9 m
272
+17%
232
+28%
181
+11%
163
Average no. of employees
8,063
+15%
7,032
10%
6,369
+21%
5,262
Operating Revenues
3,629.5
+21%
2,988.1
+2%
2,942
+8%
2,713.8
Net profit (adjusted)
424.3
+7.9%
393
+121 %
(86)
122%
390.7
Chart 1: Operating expense (by nature)
Decompositon of operating expenses 3500
billion euro
3000 2500 2000 1500 1000 500 0
2011
2010
2009
Other Operating expenses
1.072,5
911,9
1.100,0
Depreciation & Amortization
281,43
257,17
222,28
Personnel Expenses
376,1
335
309,3
Cost of Materials
1320,9
979,9
1323,9
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Graph 3: Average Fare Price Industry Competitors
Average fare price 300 250 200 150 100 50 0 2008
2009 Ryanair
EasyJet
2010 Lufthansa
2011 British Airways
Graph 4: Ryanair Decomposition of Revenues
Decomposition of Revenues 4.000,0 3.500,0 3.000,0 2.500,0 2.000,0 1.500,0 1.000,0 500,0 0,0 Scheduled Revenues Ancillary
2008
2009
2010
2010
2.225,7
2.343,9
2.324,5
2.827,9
488,1
598,1
663,6
801,6
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Appendix II: Accounting Adjustments Table 1: Lease payments Minimum operating lease payments Within one year In two to five years Over five years
2011 100,2 325,5 164,8
2010 77,8 208,8 112,2
2009 85,8 177,8 29,1
2008 78,2 234,8 22,2
9,26% 97,2
8,81% 95,5
8,88% 78,2
8,76% 72,7
100,2 81,4 81,4 81,4 81,4 142,6
77,8 52,2 52,2 52,2 52,2 96,3
85,8 44,5 44,5 44,5 44,5 18,9
78,2 58,7 58,7 58,7 58,7 8,4
Total present value
415,5
285,6
222,8
252,7
Adjustments to: Depreciation expense Interest expense Non-current tangible assets Non-current debt Deferred tax liability Equity
62,7 34,5 415,5 415,5 0,0 0,0
69,6 25,9 285,6 285,6 0,0 0,0
54,9 23,3 222,8 222,8 0,0 0,0
252,7 252,7 0,0 0,0
Present value commitment year 1 Present value commitments after year 1 New lease commitments Lease repayment Tax rate
91,7 323,8 201,9 72,0 11%
71,5 214,1 138,5 75,7 10%
78,8 144,0 26,1 56,1 6%
Interest rate Actual lease payment 1 2 3 4 5 6
71,9 180,8
11%
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Table 2: Depreciation EasyJet Initial cost at the beginning of the year Cost of acquisitions = Acquisitions - Disposals Depreciation expense Depreciation rate
2011
2010
2009
2008
2129 281 80 0,038419
1747,1 382,2 69,2 0,038419
1177,8 569,3 52,4 0,038419
987,8 190 41,6 0,038419 23 0,116365
2011
2010
2009
2008
5069,6 883,6 270,7 4275,2 794,4 2,7031 526,47
4220,5 849,1 226,3 3602,2 618,3 2,5271 409,76
4149,7 70,8 249,5 3552,5 597,2 2,4825 395,78
3362,4 787,3 171,1 2875,67 486,73 2,4971 322,57
2009
2008
Useful life Residual value Ryanair Initial cost at the beginning of the year Cost of acquisitions = Acquisitions - Disposals Depreciation expense Book value at the beginning of the year Accumulated depreciation Average aicraft age New Accumulated depreciation
Computations Ryanair
Corporate tax expense Non-current tangible assets 2008 Deferred tax liability 2008 Shareholder's Equity 2008 New Depreciation expense current year Non-current tangible assets current year Deferred tax liability/Tax expense current year Shareholder's Equity/Net Profit current Adjustments Ryanair
Non current tangible assets Deferred Tax Liability Shareholder's Equity Depreciation expense Tax expense
2011
2010
0,11 164,16 18,03 146,13 211,74 58,96 6,49 52,47
0,10 164,16 18,03 146,13 178,46 47,84 5,01 42,83
2011
2010
2009
2008
223,12 24,51 198,61 58,96 6,49
212,00 23,04 188,97 47,84 5,01
252,87 23,58 229,29 88,71 5,55
190,96 20,97 169,99 26,80 2,94
0,06 0,11 164,16 164,16 18,03 18,03 146,13 146,13 160,79 144,3034 88,71 26,80 5,55 2,942807 83,16 23,85383
18
Table 3: Recycling of gains and losses Recycling of gains and loses
2011
2010
2009
2008
Net Reevaluation gains(losses) on financial assets available for sale
(2,2)
23,0
(222,5)
(140,5)
13,5
222,5
91,6
(2,2)
36,5
0,0
(48,9)
2011
2010
2009
2008
2,2
(36,5)
0,0
48,9
(2,2)
36,5
0,0
(48,9)
Other Operating Income, Net of Other Operating Expense
(2,5)
40,8
0,0
(54,9)
Tax expense
(0,3)
4,3
0,0
(6,0)
Net Profit
(2,2)
36,5
0,0
(48,9)
1,107038
1
0,888585
Net Reevaluation gains(losses) on transferred the income statement Net effect on shareholder equity
Adjustments to: Statement of comprehensive income Unrealized revaluations, net of transfers to income Net Profit Income statement
19
Appendix III: Financial Statements i)
Condensed Income Statement 2011 adjusted
2010 adjusted
2009 adjusted
2008 unadjusted
3.629,5 -3.050,9
2.988,1 -2.484,0
2.942,0 -2.955,5
2.713,8 -2.261,7
578,6
504,1
-13,5
452,1
0,0
0,0
0,0
0,0
-101,2 477,4
-74,5 429,6
-78,3 -91,8
-13,2 438,9
Tax expense
-53,1
-36,4
5,7
-48,2
Profit after taxes
424,3
393,2
-86,0
390,7
0,0
0,0
0,0
0,0
424,3
393,2
-86,0
390,7
2011 adjusted
2010 adjusted
2009 adjusted
2008 unadjusted
-1.320,9
-979,9
-1.323,9
-848,0
-376,1 -281,4
-335,0 -257,2
-309,3 -222,3
-285,3 -176,0
-1.072,5
-911,9
-1.100,0
-952,4
2009 2008 adjusted unadjusted
INCOME STATEMENT Sales Operating expenses Operating profit Investment income Net interest expense (income) Profit before taxes
Minority interest - Income statement Net profit to ordinary shareholders
OPERATING EXPENSES Cost of Materials (nature) Personnel Expenses (nature) Depreciation and Amortization (nature) Other Operating Income, Net of Other Operating Expenses (nature)
ii)
Condensed Statements Of Earnings STATEMENTS OF EARNINGS
2011 adjusted
2010 adjusted
Sales Net Operating Profit after Tax Net profit + Interest expense after tax = Net operating profit after tax – Interest Expense after Tax = Interest expense x (1 – Tax rate) = Interest Expense after Tax = Net Profit
3.629,5 514,3 424,3 90,0 514,3 90,0 101,2 88,9% 90,0 424,3
2.988,1 461,3 393,2 68,2 461,3 68,2 74,5 91,5% 68,2 393,2
2.942,0 -12,6 -86,0 73,4 -12,6 73,4 78,3 93,7% 73,4 -86,0
2.713,8 402,5 390,7 11,8 402,5 11,8 13,2 89,0% 11,8 390,7
20
iii)
Adjusted Balance Sheet 2011 adjusted
2010 adjusted
2009 adjusted
2008 adjusted
ASSETS Non-Current Tangible Assets Non-Current Intangible Assets Deferred Tax Assets Other Non-Current Assets Total Non-Current Assets
5.686,3 46,8 0,0 23,9 5.757,0
4.928,0 46,8 0,0 22,8 4.997,6
4.213,7 46,8 0,0 60,0 4.320,5
4.337,3 46,8 0,0 0,0 4.384,1
Inventories Trade Receivables Other Current Assets Cash and Marketable Securities Total Current Assets
2,7 50,6 483,7 2.940,6 3.477,6
2,5 44,3 203,2 2.813,4 3.063,4
2,1 41,8 221,0 2.278,2 2.543,1
2,0 34,2 181,5 2.169,5 2.387,2
Total Assets
9.234,6
8.061,0
6.863,6
6.771,3
LIABILITIES AND SHAREHOLDERS' EQUITY Ordinary Shareholders' Equity
3.152,5
3.037,6
2.654,4
2.672,2
Minority Interest - Balance Sheet
0,0
0,0
0,0
0,0
Preference Shares
0,0
0,0
0,0
0,0
3.826,1 292,2
3.114,6 222,6
2.544,4 179,1
2.272,9 169,1
126,6
136,6
106,5
99,9
Non-Current Liabilities
4.244,9
3.473,8
2.830,0
2.541,9
Trade Payables Other Current Liabilities Current Debt Current Liabilities
150,8 1.349,7 336,7 1.837,2
154,0 1.130,1 265,5 1.549,6
132,7 1.043,6 202,9 1.379,2
129,3 1.061,1 366,8 1.557,2
Total Liabilities and Shareholders' Equity
9.234,6
8.061,0
6.863,6
6.771,3
BALANCE SHEET
Non-Current Debt Deferred Tax Liabilities Other Non-Current Liabilities (non interest bearing)
21
iv)
Condensed Cash Flow Statement
CASH FLOW STATEMENT Profit Before Interest and Tax
2011 2010 2009 2008 unadjusted unadjusted unadjusted unadjusted 420,9
341,0
-180,5
438,9
-5,9
0,0
1,9
-47,2
0,0
11,5
222,5
79,4
Non-Current Operating Accruals
269,8
266,1
275,1
190,1
Operating Cash Flow before Working Capital Investments
684,8
618,6
319,0
661,2
Net (Investments in) or Liquidation of Operating Working Capital
126,4
476,7
95,0
9,1
Operating Cash Flow before Investment in Non-Current Assets
811,2
1.095,3
414,0
670,3
-498,9
-1.772,9
-389,1
-658,7
312,3
-677,6
24,9
11,6
0,0
0,0
0,0
0,0
710,7
557,8
131,9
404,4
1.023,0
-119,8
156,8
416,0
-500,0
0,0
0,0
0,0
27,4
14,5
-44,4
-291,6
0,0
0,0
0,0
0,0
550,4
-105,3
112,4
124,4
Taxes Paid Non-Operating Losses (Gains)
Net (Investments in) or Liquidation of Operating or Investment Non-Current Assets Free Cash Flow Available to Debt and Equity
Interest Paid Net Debt (Repayment) or Issuance Free Cash Flow Available to Equity Dividend (Payments) Net share (Repurchase) or Issuance Effect of Currency Translation Differences Net Increase (Decrease) in Cash Balance
22
v)
Condensed Balance Sheet
BALANCE SHEET Ending Net Working Capital
2011
2010
2009
2008
Trade receivables
50,6
44,3
41,8
34,2
+ Inventories
2,7
2,5
2,1
2,0
+ Other current assets
483,7
203,2
221,0
181,5
– Trade payables
150,8
154,0
132,7
129,3
– Other current liabilities
1.349,7
1.130,1
1.043,6
1.061,1
= Ending Net Working Capital
-963,5
-1.034,1
-911,4
-972,7
5.686,3
4.928,0
4.213,7
4.337,3
+ Non-current intangible assets
46,8
46,8
46,8
46,8
+ Other non-current assets
23,9
22,8
60,0
0,0
– Minority interest
0,0
0,0
0,0
0,0
292,2
222,6
179,1
169,1
126,6
136,6
106,5
99,9
5.338,2
4.638,3
4.034,9
4.115,1
4.374,7
3.604,2
3.123,5
3.142,4
336,7
265,5
202,9
366,8
+ Non-current debt
3.826,1
3.114,6
2.544,4
2.272,9
+ Preference shares
0,0
0,0
0,0
0,0
– Cash
2.940,6
2.813,4
2.278,2
2.169,5
= Ending Debt
1.222,2
566,7
469,1
470,2
+ Ending Ordinary Shareholders' Equity
3.152,5
3.037,6
2.654,4
2.672,2
= Net Capital
4.374,7
3.604,2
3.123,5
3.142,4
+ Ending Net Non-Current Operating Assets Non-current tangible assets
– Deferred tax liabilities (net of assets) – Other non-current liabilities (non-interest-bearing)
= Ending Net Non-Current Operating Assets = Net Operating Assets
Ending Net Debt Current debt
23
Appendix IV: Ryanair Ratio Analysis & EasyJet Benchmarking Return on equity Ratio Return on equity
EASYJET
2011 13,46%
RYANAIR 2010 12,94%
2009 -3,24%
2011 13,20%
2010 8,06%
2009 5,45%
Traditional decomposition of ROE Ratio Net profit margin (ROS) × Asset turnover
2011 11,69% 0,39
2010 13,16% 0,37
2009 -2,92% 0,43
2011 6,52% 0,71
2010 4,07% 0,69
2009 2,67% 0,67
= Return on assets (ROA) × Financial leverage
4,59% 2,93
4,88% 2,65
-1,25% 2,59
4,63% 2,85
2,79% 2,89
1,79% 3,05
= Return on equity (ROE)
13,46%
12,94%
-3,24%
13,20%
8,06%
5,45%
2011 6,54%
2010 4,12% 153,00%
2009 1,97% 153,00%
Distinguishing operating and financing components in ROE decomposition Ratio Net operating profit margin × Operating asset turnover
2011 14,17% 0,83
2010 15,44% 0,83
2009 -0,43% 0,94
= Operating ROA
11,76%
12,80%
-0,40%
11,13%
6,29%
3,02%
Spread
4,40%
0,77%
-16,05%
10,91%
5,97%
7,30%
0,39
0,19
0,18
30,00%
33,00%
= Financial leverage gain
1,70%
0,14%
-2,84%
2,06%
1,77%
2,43%
ROE = Operating ROA + Financial leverage gain
13,46%
12,94%
-3,24%
13,20%
8,06%
5,45%
2011
2010
2009
2011
2010
2009
100,00%
0,00%
0,00%
100,00%
100,00%
100,00%
× Financial leverage
Common-sized income statement and profitability ratios Ratio Line items as a percent of sales Sales
170,00%
19,00%
24
Net operating expense Net operating profit before tax
-84,06% 15,94%
-83,13% 15,65%
-100,46% -0,26%
-92,79% 7,18%
-94,76% 5,18%
-98,49% 2,05%
Investment income Net Interest expense
0,00% -2,79%
0,00% -2,49%
0,00% -2,66%
0,00% -0,02%
0,00% -0,06%
0,00% 0,54%
Tax expense Net profit
-1,46% 11,69%
-1,22% 13,16%
0,20% -2,92%
-0,67% 6,52%
-1,11% 4,07%
0,62% 2,67%
Operating expense line items as a percent of sales Cost of materials Personnel expense Depreciation and amortization Other operating income/expense Key profitability ratios Gross profit margin
-36,39% -10,36% -7,75% -29,55%
-32,79% -11,21% -8,61% -30,52%
-45,00% -10,51% -7,56% -37,39%
-70,28% -11,79% -5,76% -4,95%
-70,47% -11,30% -6,05% -6,93%
-76,87% -11,50% -6,60% -3,52%
15,94%
16,87%
-0,46%
29,72%
29,53%
23,13%
EBITDA margin NOPAT margin Net profit margin
23,70% 14,17% 11,69%
25,48% 15,44% 13,16%
7,10% -0,43% -2,92%
12,97% 6,54% 6,52%
11,29% 4,12% 4,07%
8,11% 1,97% 2,67%
2011 -26,55% 147,08% 156,67%
RYANAIR 2010 -34,61% 155,23% 164,92%
2011 -24,83% 83,55% 75,56% -4,03
EASYJET 2010 -22,57% 88,01% 77,85% -4,43
2009 -23,61% 88,95% 74,66% -4,24
(3,23) 70% 70% 70,38 5,11 630,43 0,57 9,98 36,08
1,20 1,32 20,92 17,21 0,00 0,00 2,65 135,92
1,14 1,28 15,32 23,49 0,00 0,00 2,53 142,44
1,12 1,34 11,03 32,64 0,00 0,00 2,73 131,83
2009 1,84 1,68 1,65 0,30
2011 1,48 1,48 1,34 0,36
2010 1,42 1,42 1,17 0,34
2009 1,40 1,40 1,10 0,13
Asset management ratios Ratio Operating working capital/Sales Net non-current assets/Sales PP&E/Sales Operating working capital turnover Net non-current asset turnover PP&E turnover Trade receivables turnover Days’ receivables Inventories turnover Days’ inventories Trade payables turnover Days’ payables
(3,77) 64% 64% 71,73 5,02 489,22 0,74 8,76 41,10
(2,89) 61% 61% 67,45 5,34 391,96 0,92 6,36 56,58
2009 -30,98% 137,15% 143,22%
Liquidity ratios Ratio Current ratio Quick ratio Cash ratio Operating cash flow ratio
2011 1,89 1,63 1,60 0,44
2010 1,98 1,84 1,82 0,71
Debt and coverage ratios 25
Ratio Liabilities-to-equity
2011 1,93
2010 1,65
2009 1,59
2011 1,85
2010 1,89
2009 2,05
Net debt-to-equity Net debt-to-net capital
0,39 0,28
0,19 0,16
0,18 0,15
0,19 0,16
0,30 0,23
0,33 0,25
Interest coverage (earn.based)
5,72
89,80
73,40
Interest coverage (cash flow based)
8,07
14,71
5,26
380,00
10,40
2011 13,46% 117,83%
2010 12,94% 0,00%
2009 -3,24% 0,00%
2011 13,20% 0,00%
2010 8,06% 0,00%
2009 5,45% 0,00%
-2,40%
12,94%
-3,24%
13,20%
8,06%
5,45%
6,77 RYANAIR
-0,17
202,80 EASYJET 452,00
Sustainable growth rate Ratio ROE Dividend payout ratio
Sustainable growth rate
26
Appendix V: Forecasts
Sales growth NOPAT margin Net interest rate after tax Operating asset turnover Net financial leverage BALANCE SHEET Net assets (end-of-year) Net debt (end-of-year) Equity (end-of-year) INCOME STATEMENT Sales NOPAT Net interest expense after tax Net profit
2011R
2012E
2013E
2014E
2015E
2016E
21,47% 14,20% 7,00%
17,51% 12,90% 7,00%
15,02% 12,60% 7,00%
12,17% 11,70% 7,00%
9,30% 10,80% 7,00%
7,85% 10,20% 7,00%
0,83
0,96
1,04
1,09
1,10
0,39
0,45
0,51
0,56
2011R
2012E
2013E
4.374,7
4.661,1
1.200,0
2017E
2018E
2019E
2020E
2021E
2022E
7,56% 9,50% 7,00%
6,40% 8,70% 7,00%
5,82% 7,20% 7,00%
5,32% 6,50% 7,00%
4,00% 6,50% 7,00%
4,00% 6,50% 7,00%
1,13
1,16
1,20
1,20
1,18
1,18
1,18
0,62
0,66
0,70
0,73
0,75
0,81
0,81
0,81
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
5.008,2
5.400,9
5.701,7
5.944,7
6.122,0
6.465,7
6.924,9
7.201,9
7.490,0
2.368,0
2.784,3
3.339,8
3.763,1
4.158,1
4.485,0
4.881,5
5.624,2
5.849,2
6.083,1
3.174,7
2.293,1
2.223,9
2.061,1
1.938,7
1.786,6
1.637,0
1.584,2
1.300,8
1.352,8
1.406,9
2011R
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
3.629,5
4.220,6
4.854,5
5.445,5
5.951,9
6.418,9
6.904,2
7.346,0
7.773,8
8.187,6
8.515,1
8.855,7
515,4
544,5
611,7
637,1
642,8
654,7
655,9
639,1
559,7
532,2
553,5
575,6
84,0
165,8
194,9
233,8
263,4
291,1
314,0
341,7
393,7
409,4
425,8
-
431,4
378,69
416,8
403,3
379,4
363,7
341,9
297,4
166,0
122,8
127,7
575,6
27
FORECASTING ASSUMPTIONS
2011R
2012E
2013E
Sales growth NOPAT margin Net interest rate after tax
21.47% 14.20% 7.00%
17.51% 12.90% 7.00%
15.02% 12.60% 7.00%
0.83
0.96
0.39
Operating asset turnover Net financial leverage
BALANCE SHEET Net assets (end-of-year) Net debt (end-of-year) Equity (end-of-year)
INCOME STATEMENT Sales NOPAT Net interest expense after tax Net profit
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
12.17% 11.70% 7.00%
9.30% 10.80% 7.00%
7.85% 10.20% 7.00%
7.56% 9.50% 7.00%
6.40% 8.70% 7.00%
5.82% 7.20% 7.00%
5.32% 6.50% 7.00%
4.00% 6.50% 7.00%
4.00% 6.50% 7.00%
1.04
1.09
1.10
1.13
1.16
1.20
1.20
1.18
1.18
1.18
0.45
0.51
0.56
0.62
0.66
0.70
0.73
0.75
0.81
0.81
0.81
2011R
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
4,374.7
4,661.1
5,008.2
5,400.9
5,701.7
5,944.7
6,122.0
6,465.7
6,924.9
7,201.9 7,490.0
1,200.0
2,368.0
2,784.3
3,339.8
3,763.1
4,158.1
4,485.0
4,881.5
5,624.2
5,849.2 6,083.1
3,174.7
2,293.1
2,223.9
2,061.1
1,938.7
1,786.6
1,637.0
1,584.2
1,300.8
1,352.8 1,406.9
2011R
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
3,629.5
4,220.6
4,854.5
5,445.5
5,951.9
6,418.9
6,904.2
7,346.0
7,773.8
8,187.6 8,515.1
8,855.7
515.4
544.5
611.7
637.1
642.8
654.7
655.9
639.1
559.7
532.2
553.5
575.6
84.0
165.8
194.9
233.8
263.4
291.1
314.0
341.7
393.7
409.4
425.8
-
431.4
378.69
416.8
403.3
379.4
363.7
341.9
297.4
166.0
122.8
127.7
575.6
28
CASH FLOW STATEMENT NOPAT Change in net assets Free cash flow to debt and equity Net interest expense after tax Change in net debt Free cash flow to equity
2011R
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
544.5
611.7
637.1
642.8
654.7
655.9
639.1
559.7
532.2
553.5
286.5
347.1
392.6
300.9
243.0
177.3
343.7
459.2
277.0
288.1
258.0
264.6
244.5
341.9
411.8
478.6
295.4
100.5
255.2
265.4
165.8
194.9
233.8
263.4
291.1
314.0
341.7
393.7
409.4
425.8
1,168.0
416.3
555.5
423.3
395.0
326.9
396.5
742.7
225.0
234.0
1,260.3
485.9
566.2
501.8
515.7
491.5
350.2
449.5
70.7
73.6
2022E
29
FORECASTING ASSUMPTIONS
2011R
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
Sales growth NOPAT margin Net interest rate after tax
21,47% 14,20% 7,00%
19,20% 12,90% 7,00%
18,70% 12,60% 7,00%
15,80% 11,70% 7,00%
13,30% 10,80% 7,00%
12,20% 10,20% 7,00%
9,60% 9,50% 7,00%
8,50% 8,70% 7,00%
8,30% 7,20% 7,00%
7,80% 6,50% 7,00%
4,00% 6,50% 7,00%
4,00% 6,50% 7,00%
Operating asset turnover Net financial leverage
0,83 0,39
0,96 0,45
1,04 0,51
1,09 0,56
1,10 0,62
1,13 0,66
1,16 0,70
1,20 0,73
1,20 0,75
1,18 0,81
1,18 0,81
1,18 0,81
BALANCE SHEET
2011R
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
Net assets (end-of-year) Net debt (end-of-year) Equity (end-of-year)
4.374,7 1.200,0 3.174,7
4.810,3 2.443,8 2.366,5
5.335,6 2.966,3 2.369,3
5.964,4 3.688,3 2.276,1
6.550,9 4.323,5 2.227,4
6.959,6 4.867,9 2.091,6
7.308,7 5.354,4 1.954,3
7.899,7 5.964,1 1.935,6
8.659,6 7.033,0 1.626,6
9.006,0 7.314,4 1.691,7
9.366,3 7.606,9 1.759,3
INCOME STATEMENT
2011R
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
Sales NOPAT Net interest expense after tax Net profit
3.629,5 515,4
4.220,6 544,5
5.009,8 631,2
5.801,4 678,8
6.573,0 709,9
7.374,9 752,2
8.082,9 767,9
8.769,9 763,0
9.497,8 683,8
10.238,6 665,5
10.648,2 692,1
11.074,1 719,8
84,0
171,1
207,6
258,2
302,6
340,8
374,8
417,5
492,3
512,0
532,5
-
431,4
373,39
423,6
420,6
407,2
411,5
393,1
345,5
191,5
153,5
159,6
719,8
CASH FLOW STATEMENT
2012E
2013E
2014E
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
NOPAT Change in net assets Free cash flow to debt and equity Net interest expense after tax Change in net debt Free cash flow to equity
544,5 435,7 108,8 171,1 1.243,8 1.181,6
631,2 525,2 106,0 207,6 522,5 420,8
678,8 628,9 49,9 258,2 722,0 513,7
709,9 586,4 123,4 302,6 635,2 456,0
752,2 408,7 343,6 340,8 544,4 547,3
767,9 349,2 418,7 374,8 486,4 530,4
763,0 591,0 172,0 417,5 609,7 364,2
683,8 760,0 (76,1) 492,3 1.069,0 500,5
665,5 346,4 319,1 512,0 281,3 88,4
692,1 360,2 331,9 532,5 292,6 92,0
30
Table 1: Valuation Assumptions VALUATION ASSUMPTIONS Cost of equity Cost of capital (WACC) Terminal growth rate
9,93% 9,78% 4,00%
Beta ERM Rf
0,79 11,70% 3,29%
Most recent share price Shares outstanding Cost of debt
3,5 1.400,0 10,29%
Equity market value
4.900,0
Table 2: Free Cash Flow Model FREE CASH FLOW MODEL Free cash flow to equity Discount factor PV FCF to equity
1
2
4
5
6
7
8
9
10
1.181,6 0,9096 1.074,8
420,8 0,8274 348,2
456,0 0,6847 312,2
547,3 0,6228 340,8
530,4 0,5665 300,5
364,2 0,5153 187,7
500,5 0,4688 234,6
88,4 0,4264 37,7
92,0 0,3879 35,7
Table 3 Value of FCFs during the forecast horizon Terminal value Total equity value (DCF) Number of shares outstanding Equity value per share (DCF)
3.258,8 625,27 3.884,1 1.400,0 2,8
31
Table 4: Abnormal Earnings Model 1
2
4
5
6
7
8
9
10
Net profit
373,4
423,6
407,2
411,5
393,1
345,5
191,5
153,5
159,6
Required earnings
315,4
235,1
226,1
221,3
207,8
194,1
192,3
161,6
168,0
Abnormal earnings
58,0
188,5
181,1
190,2
185,3
151,4
(0,7)
(8,1)
(8,4)
0,9096
0,8274
0,6847
0,6228
0,5665
0,5153
0,4688
0,4264
0,3879
52,8
156,0
124,0
118,5
105,0
78,0
(0,4)
(3,4)
(3,3)
ABNORMAL EARNINGS MODEL
Discount factor PV of Abnormal earnings
Table 5 Book value of equity Value of AEs during the forecast horizon Terminal value Total equity value (AE) Number of shares outstanding Equity value per share (AE)
3.174,7 766,6 (57,1) 3.884,1 1.400,0 2,8
32
Appendix VI: Data for Beta Estimation Monthly average FTSE 5480.0825 5400.608636 5408.619048 5228.501364 5266.769545 5909.752857 5792.179091 5937.953 6007.85 5856.91087 6020.963 5971.586 5869.028095 5735.613636 5687.171429 5515.127727 5279.919048 5150.708095 5139.440909 5206.876471 5716.838889 5621.021739 5231.92 5411.645 5309.542857 5242.280952 5161.177273 5043.4 4760.078947 4374.5 4353.852381 4393.778947 4046.335 3760.236364 4066.863158 4281.838095 4270.752381 4223.96 4282.052174 5231.704545 5465.705 5375.217391 5778.266667 6187.195 5993.568182 5676.268421 5908.31 6031.186364 Source: Google Finance
Monthly average price price 3.75 3.57 3.26 3.12 3.05 3.36 3.57 3.51 3.35 3.31 3.61 3.75 3.79 3.88 4.09 3.87 3.83 3.82 3.66 3.31 3.91 3.52 3.46 3.41 3.15 2.88 3.32 3.40 3.14 3.24 3.45 3.36 3.16 2.88 3.14 3.126666667 2.99 2.8775 2.294347826 2.603181818 2.637 2.806086957 2.994761905 2.853 2.809545455 2.970526316 3.482 3.912727273
Index variation 1.47% -0.15% 3.44% -0.73% -10.88% 2.03% -2.45% -1.16% 2.58% -2.72% 0.83% 1.75% 2.33% 0.85% 3.12% 4.45% 2.51% 0.22% -1.30% -8.92% 1.70% 7.44% -3.32% 1.92% 1.28% 1.57% 2.34% 5.95% 8.81% 0.47% -0.91% 8.59% 7.61% -7.54% -5.02% 0.26% 1.11% -1.36% -18.15% -4.28% 1.68% -6.98% -6.61% 3.23% 5.59% -3.93% -2.04% -
Price variation 5.18% 9.42% 4.64% 2.07% -9.18% -5.83% 1.84% 4.67% 1.22% -8.28% -3.83% -1.14% -2.17% -5.13% 5.73% 0.94% 0.29% 4.51% 10.50% -15.32% 11.03% 1.71% 1.42% 8.33% 9.33% -13.22% -2.38% 8.12% -2.92% -6.09% 2.54% 6.43% 9.64% -8.32% 0.54% 4.57% 3.91% 25.42% -11.86% -1.28% -6.03% -6.30% 4.97% 1.55% -5.42% -14.69% -11.01% 33
Appendix VII: European Debt Ratings Prediction Model Measure
Coefficient book Table 10.8
Ryanair ratios 2011
Current Score
Intercept Natural logarithm of net assets (in € billions) NOPAT to net interest expense after tax NOPAT to net capital (Operating ROA)
2,504
1,000
2,504
0,667
1,476
0,984
0,053
5,717
0,303
2,507
0,118
0,295
Standard deviation of Operating ROA
-2,859
0,073
-0,210
Net debt to net capital Total
-0,259
0,279
-0,072
8,663
3,804
Indicator Firm size Interest coverage Profitability Riskiness of profit stream Leverage Total score
Rating Cost of debt
BBB rating 10,29%
Appendix VIII: Valuation Multiples
Number of Shares (mil) Share Price 1/03/2011 Market Capitalization (mil) Equity BV per share Earnings per share Multiples P/E P/BV
Finnair (EUR) 128,1 4,4 562,5 752,5 5,9 (0,8) (5,9) 0,7
329,0 21,4 7.040,6 12.433,0 37,8 (5,1)
Air Lingus (EUR) 530,1 0,9 479,7 836,7 1,6 0,1
RyanAir (EUR) 1.489,0 3,5 5.211,5 2.953,9 2,0 0,3
(4,2) 0,6
7,0 0,6
14,0 1,8
Norwegian Air (MNOK)
EasyJet(GBP)
SAS (NOK)
34,9 110,5 3.854,2 1.771,1 50,8 3,5
395,9 3,9 1.530,9 1.705,0 4,3 0,6
31,9 2,2
6,8 0,9
34
References
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