RYANAIR: SHORT SELL

RYA is a great business. It has industry leading cost control and margins, and is now repositioning itself to improve the quality of its offering to compete with EZJ. But there is also a lot of good news in the price.

The sector is loved. The oil price is supposed to be a windfall in terms of both fuel input costs decreasing, and the consumer having a tax cut to increase discretional spend, like flights to go abroad.

But the capacity increases across the sector are leading to price wars meaning that the benefits that should have been felt are now being passed onto the consumer in the form of lower fares. What happens when this oil tailwind subsides?

On top of this we have a deteriorating macro picture. Outside of general global growth concerns, to which airlines and RYA are very leveraged, we now have the specific issue of a BREXIT and the impact that is having on currencies.

RYA are net buyers of USD, so cable strength is unhelpful, and both the low cost carriers enjoyed a boost last summer with the GBP/EUR. With a 10% move in this cross and little prospect of a meaningful reversal until the result in June, the comps are looking much tougher this summer. And that is before we look at the possible demand impact that a 10% currency move will have for the UK.

At 14x earnings and the share price 8% from all time highs, we do not feel these risks are adequately priced, particularly in the context of what has happened to other cyclical sectors of late. SELL