Investors’ Chronicle: EasyJet, Accrol, Fevertree

BUY: EasyJet (EZJ)

Stronger winter trading means full-year profits should beat expectations at the budget airline, writes Michael Fahy.

Ryanair’s daily flight numbers last week were at 114 per cent of pre-pandemic levels, but EasyJet has been slower off the mark. Its daily flight numbers last week were only at 63 per cent of 2019 levels, according to Eurocontrol.

Not all of this is its fault, and the airline has been unlucky in that two of its main hubs — London Gatwick and Amsterdam — imposed capacity restrictions last summer to cope with the ramp up in activity. Amsterdam’s limits are still in place until April.

The airline’s trading update, for the final three months of 2022, shows clear progress, though. Although it recorded another headline loss of £133mn, this was a £100mn improvement on the Covid-disrupted period a year earlier. Passenger numbers grew by 47 per cent on the year, and revenue per seat was up by 36 per cent. The average load factor (the ratio of passengers to available seats) rose by 10 per cent and ticket yield grew by 21 per cent.

On top of this, the company made more from add-ons — airline ancillary revenue also grew by 36 per cent, to £20.12 per seat.

Its holidays arm (which launched at the end of 2019 but only really began operating in earnest last year) generated a £13mn profit, up from a loss of £1mn a year earlier. Demand from UK holidaymakers is strong, with 60 per cent of the summer holidays it had planned to sell already booked. This was based on the company increasing customer numbers by 30 per cent this year, but given the response it has now lifted this target to 50 per cent.

Chief executive Johan Lundgren said that it expects losses during the winter “to reduce significantly” compared with last year, meaning that over the full year to September it expects to beat the market’s current consensus of a £126mn pre-tax profit.

In the past month the airline’s shares have jumped by 50 per cent and although they currently trade at almost 27 times FactSet’s consensus forecast earnings — well above their five-year average — the company is still in the early stages of its recovery. On next year’s consensus forecast of around 36p a share, they trade at a much more reasonable-looking 14-times earnings.

SELL: Accrol (ACRL)

A strategic review has prioritised shareholder returns, yet earnings remain in negative territory, writes Mark Robinson.

Accrol prides itself on being the UK’s leading independent tissue converter. In other words, a producer of toilet tissue, kitchen towel, and biodegradable wet wipes.

Given recent history, you would imagine that market trends have been running in its favour, particularly as consumers ditch named brands in favour of value options. It’s true that the top line has risen appreciably since 2019, but a positive transition from gross profits through to net earnings has proved elusive. The group’s interim sales surged through to the end of October, but the gross margin — at 18 per cent — is down by 6.7 percentage points year on year, continuing the slide that was evident at the group’s April year-end.

Accrol’s chief executive Gareth Jenkins said the group “successfully leveraged [its] supply position with customers to recover all additional costs incurred in the period”. But there were no apparent scale benefits flowing through to net earnings despite a 14 per cent increase in volumes.

To counter rising costs and supply chain disruption, the group has increased inventories by 77 per cent since the 2021 half year. Net borrowing has also swollen through the period, although management points to a multiple equivalent to a manageable 1.5 times cash profits.

The outcome of a strategic review, undertaken in 2022 with the support of Deloitte, was published alongside the half-year figures. In short, it prioritises the construction of a sustainable paper mill and the return of cash to shareholders through dividends and/or share buybacks. Unfortunately, these ambitions seem at odds with the group’s finances — last April’s quick ratio came up well short of the five-year average of 0.66, as per FactSet. Admittedly, the shares were marked up on results day, but the 23 per cent premium to net asset value is difficult to justify.

SELL: Fever-Tree (FEVR)

The cost outlook for the drinks company looks challenging this year, which has hurt profit forecasts, writes Christopher Akers.

Fever-Tree shares were marked down by 10 per cent after the premium tonics and mixers supplier undershot consensus revenue growth forecasts and warned about the “material” impact of higher energy costs on glass manufacturing.

Total revenues rose by 11 per cent to £344mn in the year to December 31 2022, below analyst hopes of £357mn according to FactSet. Sales contracted by 2 per cent in the company’s biggest market, the UK, but rose by double-digits in its other locales. The best showing was in the US, where there was a 23 per cent top line uplift.

Chunky cost inflation continues to cause difficulties for the business. Management expects “further double-digit percentage increases” in key costs this year and said that volatile energy prices will add £20mn to its glass costs in 2023 compared to pricing in the first quarter of last year.

While Fever-Tree expects to deliver adjusted cash profits in line with expectations for 2022, forecasts for this year suggest a further softening of margins. Management set out guidance ranges of £390mn-£405mn for revenue and £36mn-£42mn for Ebitda for 2023, with annual cash profits only expected to be “in-line” with last year.

RBC Capital Markets analysts said this guidance “is very disappointing given previous comments about further profitability improvements to come as freight costs eased and local supply in the US ramped up.” They added that the update “does not reassure” over Fevertree’s profitability trajectory.

We are also not reassured. And the valuation remains at unjustifiably lofty levels — the shares trade at 43 times forward earnings, according to FactSet.