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Flybe offers good value currently

By Gary Newman | Thursday 28 April 2016

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Flybe (FLYB) has seen its share price fall steadily since the start of the year, and at close to 12 month lows I definitely think it is worth another look.

Its trading statement, released at the end of January, sent the shares into a spin and has seen tyhe share price drop from the mid-80s to the current level of around 56p and a market cap of just £125 million.

The company has had its share of problems in recent times, including having hedged at high levels prior to the collapse in fuel prices, plus its Project Blackbird was costing £26 million per annum, but that finally ended last November when the company decided to keep on six of the Embraer E195 jets and use them on existing routes to replace old aircraft. The cost of doing so has been significantly reduced as well, costing £20 million for 2015/16, £10 million the year after, and dropping to £4 million by year four.

Given that at the last set of financials for the six months up to the end of September 2015, the company made a net profit of £26.8 million, with an operating profit of £21.9 million, the current market valuation would seem to be on the low side, especially as it is reducing its costs and liabilities – in March the company bought three planes for $34 million as part of its plan to move to outright ownership rather than leasing (at a cost of £37 million for six months, as per the interims).

It doesn’t have huge amounts of debt, with around £111 million in total at the last accounts and only £12.4 million of that as a current liability (£6.4 million loan repayments were made during that six month period as well), and total finance costs of £1.3 million for the period.

At the end of March the company still had cash and equivalents of £171.3 million, so is in a strong position there.

The latest trading update also didn’t have any nasty surprises and mentioned that full year results to the end of March 2016 were expected to be in line with expectations, despite events such as the Paris bombings causing temporary blips in passenger numbers. The forward looking statement for the coming summer showed that additional seating allocated is being sold as planned, with 21% already sold by the start of April and with a 17% increase in capacity compared to 2015.

The company has also hedged 90% of its 2016/17 fuel and currency exposure, which reduces any risks on that front and makes up a big chunk of its annual costs, at around $120 million for fuel and $315 million in US Dollars, even though the subsequent rise in the Dollar has so far impacted operating costs by £7 million since the start of the year – that could all change though and could look a good move in months to come!

In the past Flybe has been quite heavily shorted, but currently there are no notifiable shorts in excess of 0.5%, plus a number of institutional investors and funds hold fairly large amounts of shares.

There are still plenty of risks with this company as it is in a very competitive market with tight margins, meaning it wouldn’t take a lot of bad luck to return to making a loss again, but at the current market cap I view that as a risk worth taking due to the potential upside. The last time this company recovered from a big dip the share price quickly headed back to the 90p area, and I see no reason why it can’t do so again as long as things go to plan.

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