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EasyJet plc
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== Valuation == === What's the expected return of an investment in the company? === The Stockhub users estimate that the expected return of an investment in EasyJet plc over the next five years is '''positive 8.5%'''. This value was arrived at through the use an intrinsic valuation in the form of a discounted cash flow model. A relative valuation through a comparable company analysis was also conducted, although this resulted in a wildly different share price, and so provides a far less reliable estimate for the valuation. Assuming that a suitable return level of five years is 10% per year (based of the S&P 500 returns) and EasyJet achieves its return level of positive 8.5%, then the company can be considered 'undervalued'. === What are the assumptions used to estimate the return? === ==== Key Inputs ==== {| class="wikitable" !Description !Value !Commentary |- |Valuation Model |Discounted Cash Flow and Comparable Company Analysis |Two main approaches can be used to estimate the value of an investment: # One form of intrinsic valuation is the discounted cash flow model where future cash flows are discounted to the present value. # Comparing key financial metrics of the company to other similar investment Research has suggested that to estimate the expected return of an investment over a long-term investment horizon, a discounted cash flow model provides an accurate projection. For completeness a comparable company analysis has been conducted, however the accuracy of the analysis is limited due to the fact that the effects of the COVID-19 pandemic may have affected different airlines to varying extents, thus vastly diverging their share price and debt. |- |Financial Projections |Stockhub, CapitalIQ, Yahoo Finance |To improve the reliability of financial projections, a mixture of sources was used when projecting key financial metrics such as revenue. |- |Discount Rate |WACC |The weighted average cost of capital was used as the discount rate as it expresses the return that both bondholders and shareholders demand to provide the company with capital. The cost of equity and cost of debt have been calculated in the tables provided below using values taken from the company's financial statements, beta for the stock, and expected market returns. |} ===Discounted Cash Flow Model=== {| class="wikitable" | colspan="15" |Current Share Price: £4.46 |- !''£ million'' ! colspan="9" |''Historical'' ! colspan="5" |''Projected'' |- ! !2014 !2015 !2016 !2017 !2018 !2019 !2020 !2021 !2022 !2023 !2024 !2025 !2026 !2027 |- ! colspan="15" |Income Statement |- |Revenue |4527 |4686 |4669 |5047 |5898 |6385 |3009 |1458 |5769 |8192 |9175 |9726 |10212 |11029 |- |''% growth'' | |4% |0% |8% |17% |8% | -53% | -52% |296% |42% |12% |6% |5% |8% |- | | | | | | | | | | | | | | | |- |Cost Of Goods Sold |3480 |3474 |3595 |3931 |4462 |4836 |2773 |1641 |4404 |6243 |6993 |7412 |7783 |8405 |- |''% of revenue'' |77% |74% |77% |78% |76% |76% |92% |113% |76% |76% |76% |76% |76% |76% |- | | | | | | | | | | | | | | | |- |Gross Profit |1047 |1212 |1074 |1116 |1436 |1549 |236 | -183 |1365 |1949 |2182 |2313 |2429 |2623 |- | | | | | | | | | | | | | | | |- |Selling General & Admin Exp. |103 |102 |107 |122 |143 |157 |107 |60 |173 |192 |215 |228 |239 |258 |- |''% of revenue'' |2% |2% |2% |2% |2% |2% |4% |4% |3% |2% |2% |2% |2% |2% |- | | | | | | | | | | | | | | | |- |Depreciation & Amort. |106 |125 |157 |181 |199 |484 |485 |456 |539 |313 |350 |371 |390 |421 |- |''% of revenue'' |2% |3% |3% |4% |3% |8% |16% |31% |9% |4% |4% |4% |4% |4% |- | | | | | | | | | | | | | | | |- |Amort. of Goodwill and Intangibles |12 |13 |12 |14 |15 |15 |18 |24 |25 |21 |24 |25 |27 |29 |- |''% of revenue'' |0.3% |0.3% |0.3% |0.3% |0.3% |0.2% |0.6% |1.6% |0.4% |0.3% |0.3% |0.3% |0.3% |0.3% |- | | | | | | | | | | | | | | | |- |Other Operating Expense/(Income) |243 |275 |291 |367 |490 |427 |373 |283 |637 |543 |608 |644 |676 |730 |- |% of revenue |5% |6% |6% |7% |8% |7% |12% |19% |11% |7% |7% |7% |7% |7% |- | | | | | | | | | | | | | | | |- |Total Operating Expenses |464 |515 |567 |684 |847 |1083 |983 |823 |1374 |1068 |1197 |1269 |1332 |1438 |- | | | | | | | | | | | | | | | |- |Operating Income/ EBIT |583 |697 |507 |432 |589 |466 | -747 | -1006 | -9 |880 |986 |1045 |1097 |1185 |- | | | | | | | | | | | | | | | |- |EBITDA |690 |822 |664 |613 |788 |703 | -491 | -772 |255 |1193 |1336 |1416 |1487 |1606 |- | | | | | | | | | | | | | | | |- |Tax Expense |131 |138 |70 |80 |87 |81 | -194 | -178 | -39 |157 |175 |186 |195 |211 |- |''Effective tax rate'' |22% |20% |14% |19% |15% |17% |26% |18% |433% |18% |18% |18% |18% |18% |- | | | | | | | | | | | | | | | |- |EBIAT |452 |559 |437 |352 |502 |385 | -553 | -828 |30 |723 |810 |859 |902 |974 |- | | | | | | | | | | | | | | | |- ! colspan="15" |Cashflow |- |D&A |106 |125 |157 |181 |199 |484 |485 |456 |539 |313 |350 |371 |390 |421 |- |''% of revenue'' |2% |3% |3% |4% |3% |8% |16% |31% |9% |4% |4% |4% |4% |4% |- | | | | | | | | | | | | | | | |- |Capital Expenditure | -426 | -509 | -549 | -586 | -931 | -954 | -659 | -140 | -501 | -1015 | -1137 | -1205 | -1266 | -1367 |- |''% of revenue'' |9% |11% |12% |12% |16% |15% |22% |10% |9% |12% |12% |12% |12% |12% |- | | | | | | | | | | | | | | | |- |Change in NWC |28 | -193 |242 | -252 | -169 | -481 | -462 |809 | -146 | -187 | -210 | -222 | -233 | -252 |- |% of revenue |1% | -4% |5% | -5% | -3% | -8% | -15% |55% | -3% | -2% | -2% | -2% | -2% | -2% |- | | | | | | | | | | | | | | | |- |'''<u>Unlevered FCF</u>''' | |104 |368 | -197 |199 | -61 |396 | -265 | -1321 |'''214''' |'''208''' |'''233''' |'''247''' |'''259''' |} {| class="wikitable" !WACC ! !Notes |- |'''Weights''' | | |- |Total Debt |3642 | |- |Market Cap |3410 | |- |Total |7052 | |- |Wd |52% |Weight of debt calculated as the total debt as a proportion of total capital. |- |We |48% |Weight of equity calculated as the market cap as a proportion of total capital |- | | | |- |'''Debt''' | | |- |Total Debt |3642 |Cost of debt was calculated by taking interest expenses from the income statement and dividing this by the total debt making note of the fact that debt is a tax deductable item. |- |Interest Expense | -177 | |- |Rate |5% | |- |Effective Tax Rate |18% | |- |Rd(1-t) |4.0% | |- | | | |- |'''Equity''' | | |- |Risk Free Rate |3.9% |Capital asset pricing model was used to calculate the cost of equity. Risk free rate of the UK Gilt Yield was used. |- |Beta |2.5 |Beta for the stock was found from Yahoo Finance<ref>https://uk.finance.yahoo.com/</ref> |- |Market Rate |10% |Current market rate was calculated as the average returns of the S&P 500 over the past 50 years. |- |Re |19.1% | |- | | | |- |'''<u>Discount Rate</u>''' |'''11.32%''' | |- |'''<u>Perpetuity Growth Rate</u>''' |'''2.0%''' |A perpetuity growth rate of 2% was used as this is sufficiently low to ensure that the company is not projected to increase in size far faster than the global economy in the very long term. |} {| class="wikitable" !DCF ! !2023 !2024 !2025 !2026 !2027 !Terminal Value (Perpetuity Growth) !Notes |- | colspan="8" |'''''£ million''''' | |- |FCF | | 214.0 | 208.1 | 233.1 | 247.0 | 259.4 | 2,840.1 |The terminal value of the company was calculated using the Gordon Growth Model<ref>https://einvestingforbeginners.com/terminal-value-gordon-growth-model-daah/</ref>. |- |PV of FCF |841.81 | colspan="7" rowspan="10" | |- |Terminal Value | 2,840.11 |- |NPV of TV |1661.67 |- |Enterprise Value |2503.48 |- |Net Debt | -1163 |- |Equity Value |3666.5 |- |Shares Out |758 |- |'''<u>Equity Value per Share</u>''' |'''£4.84''' |- |<u>'''Current share price'''</u> |'''£4.46''' |- |''Difference'' |8.5% |} ===Sensitivity Analysis=== A sensitivity analysis was also conducted to reflect how changes in the required rate of return and perpetuity growth rate would affect the intrinsic value of the company. {| class="wikitable" ! colspan="2" rowspan="2" | ! colspan="5" |Perpetuity Growth |- !1.0% !1.5% !2.0% !2.5% !3.0% |- ! rowspan="7" |WACC !10.0% |£4.93 |£5.07 |£5.24 |£5.42 |£5.63 |- !10.5% |£4.80 |£4.93 |£5.07 |£5.23 |£5.42 |- !11.0% |£4.68 |£4.79 |£4.92 |£5.07 |£5.23 |- !11.3% |£4.61 |£4.72 |'''£4.84''' |£4.98 |£5.13 |- !11.5% |£4.57 |£4.67 |£4.79 |£4.92 |£5.07 |- !12.0% |£4.46 |£4.56 |£4.67 |£4.79 |£4.92 |- !12.5% |£4.37 |£4.46 |£4.56 |£4.66 |£4.78 |} === Comparative company analysis === A relative valuation has been undertaken by using key metrics such as EV/Revenue and EV/EBITDA and comparing these across companies operating in the low-cost airline industry. {| class="wikitable" ! ! colspan="7" |Market Data ! ! colspan="2" |Financials ! ! colspan="2" |Valuation Ratios |- |'''Company''' |'''Ticker''' |'''Share Price''' |'''Currency''' |'''Shares Out /millions''' |'''Equity Value /millions''' |'''Net Debt /millions''' |'''Enterprise Value /millions''' | |'''Revenue /millions''' |'''EBITDA /millions''' | |'''EV/Revenue''' |'''EV/EBITDA''' |- |easyJet plc |LSE:EZJ |4.62 |GBP |758 |3,501 |150 |3,652 | |6,960 |234 | |0.52 |15.61 |- |Wizz Air Holdings plc |LSE:WIZZ |25.49 |GBP |103 |2,633 |3,890 |6,523 | |3,900 | -387 | |1.67 |N/A |- |Ryanair Holdings plc |ISE:RYA |15.83 |EUR |1,140 |18,046 | -540 |17,506 | |10,780 |2,370 | |1.62 |7.39 |- |Jet2 plc |LSE:JET2 |11.55 |GBP |214 |2,480 | -1,240 |1,240 | |5,030 |513 | |0.25 |2.42 |- |JetBlue Airways Corporation |NSQ:JBLU |8.28 |USD |328 |2,715 |2,750 |5,465 | |9,750 |594 | |0.56 |9.20 |- |Southwest Airlines Co. |NSQ:LUV |37.25 |USD |595 |22,166 | -2,290 |19,876 | |24,830 |2,120 | |0.80 |9.38 |- |Spirit Airlines, Inc. |LSE:0L8U |19.21 |USD |68 |1,311 |4,830 |6,141 | |5,450 |169 | |1.13 |36.35 |- |Allegiant Travel Company |NSE:ALGT |123.95 |USD |18 |2,284 |1,210 |3,494 | |2,450 |361 | |1.43 |9.68 |- |Frontier Group Holdings, Inc. |NSE:ULCC |9.42 |USD |219 |2,058 |2,280 |4,338 | |3,570 | -23 | |1.22 |N/A |} {| class="wikitable" !easyJet plc valuation !EV/Revenue !EV/EBITDA |- |Average Comparable Ratio |1.08 |12.4 |- |Implied Enterprise Value |7,516 |2,901 |- |Net Debt |150 |150 |- |Implied Equity Value |7,367 |2,752 |- |Shares Outstanding |758 |758 |- |Implied Value Per Share |9.72 |3.63 |- |'''Average''' | colspan="2" |'''6.67''' |- |'''Current Share Price''' | colspan="2" |'''4.46''' |- |Difference | colspan="2" |''49.6%'' |} It can be seen that the implied share price by comparing EV/Revenue ratios versus EV/EBITDA ratios is very different. This highlights the limitation to this method of valuation.
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