Investors’ Chronicle: Ryanair, Time Out, Wincanton

BUY: Ryanair (RYA)

The low-cost carrier plans to pay €0.35 per share for 2024 and 25 per cent of annual profits afterwards, writes Michael Fahy.

The share prices of many low-cost airlines have taken a hit over the past three months as investor concerns about the durability of travel demand in a tougher economic climate have grown.

Management at Ryanair remains as bullish as ever, though — announcing that the airline will pay a maiden dividend of €400mn (£347mn) this year, and distribute 25 per cent of its post-tax profit from 2025 onwards.

Although the company has a huge order of 300 new Boeings to pay for, chief executive Michael O’Leary said it was generating strong enough profits and cash flows to allow for sustained payouts. Revenue for the six months ending in September rose by 30 per cent to €8.6bn and earnings per share jumped by 72 per cent to €1.91, with passenger numbers, ticket prices and ancillary revenues all advancing at double-digit levels. 

Third-quarter bookings are also expected to be stronger than last year, and the company said full-year post-tax profit is expected to be between €1.85bn to €2.05bn, which at its midpoint is about 7 per cent higher than the current Bloomberg consensus, according to Deutsche Bank analysts.

Over the longer term, the company thinks capacity in the European short-haul market will continue to be constrained for at least two years given the difficulty manufacturers are having in delivering planes and engine maker Pratt & Whitney’s need to conduct hundreds of recalls of its GTF engines (Ryanair’s planes are not affected). Chief executive Michael O’Leary also pointed to merger activity among European airlines, saying consolidation was needed to “get rid of these flaky, perennial lossmakers”.

Ryanair’s shares jumped 6 per cent and trade at 10 times broker Peel Hunt’s forecast earnings for next March’s year-end, falling to nine times for the following year. Given its record and potential to continue grabbing more market share, we see this as decent value and justification for our buy call.

SELL: Time Out Group (TMO)

Now digital only, the publisher is trying to establish a firm foothold in new business areas, writes Jennifer Johnson.

Time Out Group, the media and hospitality company, saw pre-tax losses widen in the year to the end of June as exceptional costs connected to site closures stacked up. 

In addition to its websites, the company operates a number of “Time Out Markets” — featuring local food and drink vendors — in cities worldwide. Although it says gross revenue in this division was up 54 per cent on full-year 2022, it has encountered its share of operational difficulties. 

In June, the group shuttered its Miami market, which made a loss of £2.7mn across the year. In the process, the business incurred more than £7mn in costs, the majority of which related to non-cash impairments of assets. 

Time Out also withdrew from negotiations to open a market location in Spitalfields, London — resulting in impairment charges of £1mn. However, the company clearly thinks that markets are a promising enterprise, and it has nine contracted sites set to open between 2023 and 2027. 

On the media side, it reported digital revenue growth of 44 per cent and 16 per cent growth in its global monthly brand audience to 83mn. The group closed its remaining print titles last year, meaning that full-year 2023 was its first full year as a fully digital media company. 

Management has indicated that advertising campaigns on behalf of corporate clients will be a key growth driver for its media business going forward. Given the uncertain global economic outlook, it doesn’t seem like a good time for the company to be pinning its hopes on advertising spend. 

While the company says property developers are keen on its market proposition, we don’t think growth here is certain, either. After several years of underperformance, we think it’s time to sell.

HOLD: Wincanton (WIN)

The company’s pension surplus leaves it with room to breathe, but the macro picture is still bleak, writes Jennifer Johnson.

Logistics group Wincanton is shifting away from more volatile closed-book contracts amid a persistently difficult trading environment. With revenue and pre-tax profit both down on last year, the group’s interim results are evidence of these sustained pressures. 

Investors were not wholly put off by the figures, however, and the shares rose by almost 1 per cent on the morning of their release. This is partly because nothing in the update will have come as a surprise, but also because the group seems to be making a sustained effort to secure new clients and control its costs.

Turnover in the group’s eFulfilment business was up by nearly 12 per cent year on year, with new business growth offsetting volume declines elsewhere in the division. Lower-risk open-book contracts — in which a contractor passes on the costs it incurs plus an agreed margin — now account for 80 per cent of total revenue. Meanwhile, closed-book transport contracts make up 11 per cent of its turnover, down from 15 per cent in the first half of full-year 2022.

As of the end of March, Wincanton’s defined benefit pension scheme had an actuarial surplus of £3.9mn — compared with a deficit of £154mn at the same time three years ago. This was driven by the group’s sustained contributions, as well as the performance of the scheme’s assets. 

It has now agreed to end its cash contributions, boosting free cash flow, and unveiled a £10mn share buyback scheme. While this is certainly a boon for shareholders, and shares look cheap on a forward price/earnings multiple of nine times, we’d like to see more evidence of a recovery in the wider logistics sector.