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Buy Flybe at 116.5p – price target 250p (short term) 500p (3 years)

By Chris Oil | Sunday 21 September 2014

Disclosure: I own shares in one or more of the stocks mentioned. 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.

Following my recovery play holding of last week I promised to reveal my second private non-oil share this week – here goes it is Flybe (FLYB). This is a perfect hedge for anyone with large oil investments or a recovery play in its own right. It’s a sort of EasyJet in the making with a £250 million market cap -I reckon that should be well over £1 billion. 

Flybe is a United Kingdom based regional airline company with flying operations based out of Britain and also in Finland through a jv- it had a fleet of 96 aircraft at the time of its accounts. However the recent announcement of downsizing the fleet comes as the airline has been pushing through a turnaround plan designed to restore it to profitable growth. By moving from heavy fuel using jets to more efficient Bombardier aircraft should enhance future profitability. 

The City is starting to get excited about major expansion plans at London City Airport and with three new routes launched October 27th to Exeter combined with new flights to Manchester, passenger numbers should exceed three quarters of a million in 2015. 

Conservative broker forecasts are for £592 million in revenue and a £20 million pre-tax profit in the year to 31 March 2015 and the following year £629 million in revenue with a profit of £50 million.

In the long term this is another EasyJet in the making and a lower risk than any oil plays. 

So why are the shares so undervalued? The firm nearly went bust under the last management however the balance sheet has been sorted thanks to a placing at 110p and that £150 million of cash provides a floor in the share price and makes the company one of the best financed businesses around today. The aim is to deploy capital to own aircraft with secured loans rather than via full operating leases. 

Given the new management are ex EasyJet they know exactly what to do to drive Flybe back to historical highs. This is a real turnaround situation on multiple fronts including cutting uneconomic routes and slashing 1,100 jobs – total annualised cost savings to date are £70 million. 

I have been to a few investor presentations and CEO Saad Hammand wants to turn everything purple, offering free chocolates and a 60 minute promise on delayed flights to drive increasing repeat business. Remember that the big boys are leaving this market open to Flybe to gain market share as they have moved to compete with each other on overseas destinations. TTV adverts are getting more exposure as well which all helps increase the brand awareness with customers feeding through to the bottom line. The company makes the point that on most of its routes it is faster and cheaper to fly Flybe than to use car or rail. Next week I am going to test this theory out including some overseas flights. 

The company is nearing the end of a phased cost review on its training school which I hope it will float off or semi privatise to reduce costs and increase cash. The (MRO) maintenance operation which services 3rd parties as well will probably be held onto as I cannot see its worthwhile selling it off considering the financial benefits of maintaining the company’s own fleet. 

In terms of fuel costs, Flybe is hedged 60% and is benefiting from the downturn in oil prices on the 40% unhedged part of its book which should feed into profitable numbers in the next results on the 12th November. A capital markets day on the 28th will hopefully hint at the growth for the future off the back of the increased passenger numbers this summer. 

In summary the company is mainly a domestic airline so currency or conflict abroad has less effect on it than on others in the sector. But it has the potential to generate large profits and cashflow and this is far from discounted. 

Until the next time more ramblings from the castle can be seen @chrisoil

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  1. Hope this is better than french connection! And what happened to that black friday? Credit for your tip on hur, but salamander!

  2. Duck and Dive

    Airlines are a good play at the moment – notwithstanding terrorist attacks and Ebola. I would also recommend a dirt cheap recovery play in fastjet (FJET) which is finally getting its act together after a long and dizzying descent. It is also a bet on Africa which looks to be a happy marriage. (Current ops are in East and South Africa and unaffected by Ebola).

  3. I agree, fastjet much more exciting play. This share will fly!!

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