Liams Last Post : Ryanair revisions and the Banks continue to tumble

Good Afternoon ,

 

So November opens with a slightly better tone to ti than the way October departed. And friday night was not much fun watch ing Wall Street descend by 2.5% .

 

Ryanair ws the story in Dublin today with its results and the banks as usual , this time reacting to the news from RBS which noted that it will likely be required to make some previously unanticipated disposals.  Press reports this morning indicate that the UK Treasury expects the part nationalised banks to dispose of c. 700 branches over three to four years.  Lloyds is expected to dispose of the Cheltenham and Gloucester brand while RBS is expected to dispose of its insurance groups, its English RBS branches and potentially parts of its investment banking business.  The Treasury's focus appears to be on increasing the competition in retail banking services.  Bank of Ireland has submitted its restructuring plan to the EC while AIB and Anglo are expected to submit their plans within the next month.

 

Ryanair shares got sold off aggressively at the opening but as the day wore on the stock did manage a recovery to close only -1.6%  Following Ryanair's Q2 results and conference calls we have downgraded our earnings forecasts by 9% for FY10 to 15.2c and by a more significant 37% for FY11, effectively flat yoy at 15.3c.

The FY10, downgrade reflects lower ancillary revenue assumptions and higher expected fuel costs more than offsetting a lower forecast fall in yield and slightly lower net interest costs. We now expect ancillary revenue per passenger will be down 8% (down 10% in Q3 and Q4) versus+1% previously, with our fuel cost assumption increased by 7% reflecting the higher than expected run rate in Q2. We now expect that full-year yield will decline by -17.8% (from -20.5% previously) with Q3 and Q4 yield both expected to fall by 20% (previously assumed -27% in H2).

We are reducing our FY11 EPS forecast more significantly, by 37% from 24.2c to 15.3c (effectively flat yoy). For FY11, we now expect yield will be flat (previously +4%) but the absolute level is unchanged due to the higher than previously expected base from FY10. We now expect unit ancillary revenues will fall by 2.5% (previously flat) and off a weaker FY10. We are also increasing our fuel cost assumption by 14% for FY11 to reflect an assumed jet kerosene rate of $680 / tonne versus our previous assumption of $620. The $680 assumption reflects the 25% of FY11 hedged at c.$700 with the balance at the current spot rate of $675. These negatives are partly offset by increasing our non-fuel unit cost reduction forecast to 5% from 2%, and a slight reduction in the expected net interest charge. We have a Hold recommendation on Ryanair.

The market which has grown much more pessimistic in its view of Ryanair in the last few weeks will have to assess again the appropriate multiple that should be paid for earnings which have been downgraded so much.  Based on our new numbers a multiple of 19x 2011 earnings looks rich , the support level is the Tangible book value per share which is about Eur2.20...so even if te stock fell to this level a multiple of 14.4x is hardly cheap either.  On the other hand the stock has looked oversold on a number of technical indicators so it may tread water around here for a while. THe management team go on the road , it will be interesting to see how the markets react to Institutional holders meeting the management on a one to one basis and whether they are persuaded that there is story which justifies the higher rating as the consensus earnings expectations come back dramatically for the 2011 year.

After a stronger than expected start in Europe the market sold off only to rally again and trade in a tight range ahead of the US Opening. The ISM survey was a significant surprise rising to its highest level in more than three years. The ISM manufacturing index was 55.7 for October. That was higher than the consensus of  53 and compares to September's number of 52.6. This is the highest level since April 2006.  Pending home sales for September were up 6.1 per cent which also servedd to boost positive sentiment.

The Big economic number due on Friday will focus on the October employment report. Expectations are for a fall of 175,000 jobs during October with the unemployment rate rising 0.1 percentage points to 9.9 per cent.

Ireland we have DCC and Bank Of Ireland results to look forward to.

Have  Good Evening

Liam

 

 

___________________________________________

Liam Boggan

　

Merrion Stockbrokers

Tel.: 353-1-2404171

Mob:353-87-2313505

www.merrion-capital.com

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