There’s no such thing as a buy-and-forget investment in the airline sector but, when we find ourselves apparently mid-macro cycle as now, the economic backdrop seems relatively benign for a shorter-term investment.
What better candidate for a punt in the industry than a once down-on-its-luck airline that’s in the middle of a turnaround and expansion programme with a determination to adapt to changing business conditions in the industry in order to succeed? Such is Flybe Group (LSE: FLYB), which resides in the FTSE Small Cap index.
Crashed and burned
Flybe arrived on the stock market at the end of 2010 and the shares crashed and burned, falling from around 320p to 40p by April 2013. There was trouble in the business such as unprofitable flying routes, spare aircraft capacity and inefficient systems and operational methods.
The firm was making losses, and its constrained cash flow and weak balance sheet forced it to finance its aircraft with expensive lease arrangements rather than financially efficient loans. An unvirtuous circle set in that created even deeper losses — things looked bleak and something had to change if the company was to survive.
Conditions were perfect for change and reform, and the share price was sufficiently bombed-out for new investors to benefit from a turnaround situation — a great set-up for a turnaround investment as long as something drives change and, with Flybe, it has.
Turning things around
A determination to reform seized the directors at Flybe and things started to improve. 2013 saw change at the top with a new chief executive and a new chairman who brought a new clarity for the vision of the enterprise. Flybe wants to be Europe’s best regional airline, it reckons, and improving financial results in 2013 suggest it is now heading in the right direction.
The shares began to respond to the firm’s changing fortunes, moving from 40p in June 2013 to just under 150p in April 2014. Investors seeing the potential last year have done well, but the best may yet be to come, as during March this year Flybe raised around £150 million in a fully underwritten placing and open offer.
That’s quite a big capital injection for a firm with a market capitalisation of £262 million at today’s 121p share price, but it puts a floor under the weakness of Flybe’s capital structure and provides the funds for the firm to drive through the financial and operational efficiencies it needs to prosper.
Flying high
Flybe nudged into profitability with its full-year results released in March this year. City analysts following the firm predict a 500% increase in pre-tax profits by March 2016, which puts the firm on a forward P/E rating under seven.
Naturally the shares fell back a bit when the fundraising was announced, but over the last few days they’ve been creeping up. My guess is that the shares have further to travel as operational efficiencies and changes gather pace. To me, Flybe looks attractive right now.
