Small Cap Value Report (3 Sep 2015) - EZJ, DTG, FLYB, FRP, EMR, REDD

Thursday, Sep 03 2015 by

Good morning!

It's a positive morning for airlines, with positive news as follows (briefly, as they're not small caps);

easyJet (LON:EZJ)

This share is up 6% this morning to 1774p on a trading update which outlines strong UK summer trading (for August especially) for European beach & city destinations - late demand being presumably driven by mostly poor weather in the UK during August.

Easyjet's profit guidance range for y/e 30 Sep 2015 has been raised from £620-660m to £675-700m.

Incidentally, why can't all UK listed companies (regardless of size) publish their profit guidance range to the market, and update/narrow it as the year progresses? This is surely the best way to manage investor expectations. Even if the range was very wide for small caps, it wouldn't matter. Surely it's better to say that we expect to deliver profit of £1-2m at the shart of the year, then narrow it to say £1.5-2.0m midway through the year, and then close in on a firm figure towards the end of the year? That makes far more sense than giving a single estimate via the house broker, which then constitutes a profit warning if it's moved down. Far better to give a range surely?

Easyjet's load factor is impressive, at 94.4%, so they're almost filling their planes. I'm not surprised - the prices are keen, service is generally good I've found, and the fleet of planes are new and in good condition. So I like flying Easyjet, apart from when the flight is disrupted by noisy Stag parties - something needs to be done about that - a zero tolerance approach in my view. Also their cabin baggage policy is ridiculous - people bringing on small suitcases & trying to ram them into the overhead lockers, really slows down the embarkation process, and causes friction & stress on board as there isn't enough space.

Dart (LON:DTG)

This airline/travel/haulage group has also put out a positive announcement today, propelling the shares up 10% to 486p this morning. The shares were starting to look expensive, but that now appears to be justified from positive trading.

In a way, the PER doesn't necessarily indicate whether a share is expensive or not. It is just telling us what the market's current growth expectations are. That's fine as long as a company achieves growth which…

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easyJet plc is a United Kingdom-based low-cost airline carrier. The Company operates as a low-cost European point-to-point short-haul airline. The Company operates through its route network segment. The Company operates on over 820 routes across more than 30 countries with its fleet of over 250 Airbus aircrafts. The Company's total fleet of aircrafts is split between 156-seat Airbus A319s, 180-seat A320s and 186-seat A320s. It is also focused on operating its fleet of A320neo aircrafts. The Company's bases include the United Kingdom, Switzerland, Italy, France (Paris, Charles de Gaulle, Lyon and Toulouse), Amsterdam, Venice, Oporto, Lisbon and Barcelona. It operates in airports, such as Gatwick, Edinburgh, Nice, Milan Malpensa, Venice Marco Polo, Naples, Basel and Geneva. The Company offers a mobile application-only proposition, targeting customers wishing to switch flights at short notice on the day of travel, and also offers pre-purchased in-flight vouchers. more »

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Dart Group PLC is a leisure travel and distribution, and logistics company. The Company is engaged in the provision of air travel organizer licensing (ATOL) licensed package holidays by its tour operator, Jet2holidays Limited, and scheduled leisure flights by its airline, Limited ( It distributes temperature-controlled and ambient products on behalf of retailers, processors, growers and importers in the United Kingdom. It operates through two segments: Leisure Travel, and Distribution & Logistics. The Leisure Travel business focuses on scheduled leisure flights by to holiday destinations in the Mediterranean, the Canary Islands and to European Leisure Cities. The Distribution & Logistics business includes the operations of Fowler Welch-Coolchain Limited, a distribution and logistics services provider. Its temperature-controlled operations are in Spalding in Lincolnshire, Teynham and Paddock Wood in Kent, and Hilsea near Portsmouth. more »

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Flybe Group plc (Flybe) operates regional airline in Europe. The Company operates in two segments: Flybe UK, which comprises the Company's main scheduled United Kingdom domestic and the United Kingdom-Europe passenger operations and revenue ancillary to the provision of those services, and Flybe Aviation Services (FAS), which focuses on providing aviation services to customers, largely in Western Europe. The FAS supports Flybe's United Kingdom activities, as well as serving third-party customers. Its One Stop to the World program provides access to long-haul destinations for its customers, through its international codesharing partners at main hubs within Flybe's network. The Company has over 50 new routes focused on connecting its regional bases to regional centers in Europe, such as Rotterdam, Dusseldorf, Amsterdam, Paris and Milan, as well as some domestic route infilling, such as Edinburgh-Liverpool and Exeter-Glasgow. more »

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  Is LON:EZJ fundamentally strong or weak? Find out More »

24 Comments on this Article show/hide all

herbie47 3rd Sep '15 5 of 24

Paul, Re Fairpoint (LON:FRP) I think the reason why the share price shot up was a tip in IC. I did miss out on that but bought in when they fell back to around 158p.

I to would be interested in Redde (LON:REDD) and Empresaria (LON:EMR) if you have a chance.

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dradjackson 3rd Sep '15 6 of 24

In reply to post #105806

Possibly right there on the IC tip. And you just know that Simon Thompson will cover it again within the next week!

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Paul Scott 3rd Sep '15 7 of 24

OK, I'll do Redde (LON:REDD) and Empresaria (LON:EMR) next. I've just come off the phone with Fairpoint (LON:FRP) management, which was useful - I understand their business model a lot better now, and think it looks a good long term company to invest in. Not one I currently hold, but I might buy back at some point.


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rmillaree 3rd Sep '15 8 of 24


FRP - plus marks to this company for being run in a transparent efficient manner - having said that i haven't held the shares for long and it is probably easy to look good when things are going well.
I like the small details items to be nice and transparent and the company has certainly delivered based on a brief look at the results today.
Nice to see a company quoting exceptional costs that are reasonable (can't argue With Nil)
Not making a fuss of the fact that IVA is declining and reassuring that Margins and cost control are priories is exactly what i want to here - contrast this to the management of ENTU who seem to have had no plan with regard to declining SOLAR business which they seem to have had minimal planning in place for. To me it is pretty obvious SOLAR subsidies have done their job - getting Solar mass market - now we are there no point giving OTT subsidies although is annoying when cuts are not done in ordered planned reasonable fashion - hey ho leave it to politicians and we know what to expect.

Anyway with continued good news with regard to FRP i am not in any hurry to sell unless the price gets "silly Toppy" unfortunately when prices get Silly Toppy and i sell the price tends to go Ludicrously (thanks to Tesla for that one) Silly Toppy(LCT) (Eg EZJ/GRG/REDD) although perhaps companies that under promise and continue to deliver to plan over a decent deserve their LCT rating simply.

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CMWilliamson 3rd Sep '15 9 of 24

Thanks Paul

Dart (LON:DTG) has been one of my best performers and I'm pleased to see such a positive announcement (and reaction) this morning. I am rather concerned about taking on a substantial level of debt, though, as it changes the balance sheet significantly. Is this a cause for concern?



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janebolacha 3rd Sep '15 10 of 24

In reply to post #105811

DART may well acquire these new planes via a leasing arrangement.
Close to half of all aircraft are now financed in that way.

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neils 3rd Sep '15 11 of 24

Something else to grumble and worry about regarding Easyjet is what is happening to all the missing money not refunded? How is being accounted for?

I was on a delayed flight back in May where they completely lied to everyone about the reasons and they agreed to pay the full European compensation level of 1500 euros. Despite chasing I am still waiting for the money they owe!

With the summer we had this must now be totalling millions and millions of pounds off their profit!

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rmillaree 3rd Sep '15 12 of 24


Those profit forecasts are stupidly good in comparison to what the the company has averaged long term, i thought 2012 was a reasonably good year when the delivered £250 mill.

I always knew EZJ would do well long term but to a large degree their ability to generate profits is always due largely to factors beyond their control - Oil/Strikes/bods cash in pockets etc/Terrorism etc

They presumably have had a Golden period where things have gone in their favour - presumably the delayed decrease in their price of Oil will be filtering through now, if they are not under any undue pressure to cut prices they can bank this as extra profits, profits per flight were always ridiculously low that an extra £5 profit per flight is prolly all it takes for the profits to go mental - which they have done.

Perhaps they now are in a Utility type position where they have competitive advantage due to size and they and competitors have now informally decided not to compete too hard against each other on price - thereby everyone making more profit as consumers wont not have a summer holiday for the sake of £20 extra on the price.

I would say though with Airlines the number one rule is that the good times don't last so i would always be wary that profits could easily collapse and the share price be back down below the £1 barrier before you blink an eyelid.
Having said that its a decent long term hold and forget about company in that it is always likely to bounce back stronger than previously when it does have a setback.

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rmillaree 3rd Sep '15 13 of 24

In reply to post #105801

Ref the load factor - Easyjet have always had a good load factor factor (over 87% as far back as 2011) - its the beauty of their business model is that by altering prices they should be able to fill up most of the flights most of the time - and they seem to ditch routes as appropriate if this is not the case. Presumably they can sell over 100% capacity on the knowledge that there will always be a few cancellations - its a lovely issue to have with Flights from UK to anywhere hot in the Summer as there will always be some bods who need to get somewhere near a particular date and the prices they can charge when there are few seats left is lovely jubbly from their point of view - and thankfully those bods keep the price down to a nice level for the sensible flexible bods who are less picky date and time wise.

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kenobi 3rd Sep '15 14 of 24

In reply to post #105801

Planes fly really full these days, time was I travelled with kids too young to have their own seat and if you got on early you could nab a seat for them, these days they seem really full.
I regularly (but not frequently) travel to barcelona on easy jet I usually ask how full the plane is,
usually the answer is completely.

Whether there are people checking in late not getting a seat or not, I don't know.

It must make a significant difference to profits if your planes are just a few seats fuller, it must have near zero effect on costs.


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CMWilliamson 3rd Sep '15 15 of 24

In reply to post #105812

Thanks Jane. The nature of the leasing/financing of these aircraft is worth investigating. I agree that a good proportion are leased these days, but the balance sheet treatment should hinge on whether they are finance leases or operating leases. As I read it, the nature of the announcement implies the former, which should be on the BS.


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purpleski 3rd Sep '15 16 of 24

Thanks Paul for a fantastic report definitely the best one I have read since first joined Stockopedia back in May 2012. Don't know how you have the energy to digest lunch, I would have to a nap after all that you have had to absorb to write the report.

Dart (LON:DTG) is (now!) my largest holding but I'm actually tempted to buy more. easyJet (LON:EZJ) is 4 times the size of Dart (LON:DTG) so IF there is room for two EasyJets then who knows where it might go.

That said I am always conscious of Warren Buffef's aphorism about calling aeroholics anonymous whenever he is tempted to invest in an airline but maybe it's different this time!:-)

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whitepjs 3rd Sep '15 17 of 24

I would have thought Dart's investment was pretty necessary/inevitable given that suggests the average age of their 58 aircraft is 22.1 years old. 

Comparitive figures:

Easyjet 218 aircraft - 6.3 years
Ryanair 319 aircraft - 6.6 years
Flybe 77 aircraft - 9.4 years

Assuming the info is correct, is Dart's investment therefore to grow, or simply cut fuel costs and retire old aircraft?

Info courtesy of  (I don't, before anyone asks)

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CMWilliamson 3rd Sep '15 18 of 24

In reply to post #105824

Re-reading the announcement, it's pretty plain:

... the Company has entered into an agreement with Boeing to purchase 27 new Boeing 737-800NG aircraft. These aircraft will be delivered between September 2016 and April 2018.  


At current list prices, the total value of this transaction is approximately $2.6 billion though the Company has negotiated significant discounts from the list price.  The aircraft are expected to be funded through a combination of internal resources and debt.

So not leases of either type.  The amount of debt taken on will obviously be dependent on the discount and the internal resources utilised.


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jonesj 3rd Sep '15 19 of 24

I agree the Easy Jet hand luggage situation is unsatisfactory.

Mind you, there is a financial incentive to take hand luggage and it's much nicer to be able to walk off the plane and be outside the terminal 5 minutes after leaving the plane, as there is no waiting for checked luggage. Compare with Heathrow where the baggage handling took almost an hour on my last arrival (disgraceful service).

These A321s and 737s could benefit from a fundamental redesign. They serve the short haul market where people and airlines prefer hand luggage. So instead of having empty cargo space under the floor, they should have a lower floor and larger overhead bins for hand luggage.

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imranawan 3rd Sep '15 20 of 24

Hi Paul

Thanks for your analysis of Redde (LON:REDD). The effect tax credits have had on flattering EPS is really interesting, and certainly makes the current valuation look stretched. I don't hold, but wonder how many PIs actually closely scrutinise the income statement and read the associated notes.

Best wishes,

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FreakNomad 4th Sep '15 21 of 24

In reply to post #105826

I'm very happy that Dart are buying new aircraft.

Some of their old aircraft have had interior re-furbs, but the frames are still old. Last summer. iirc, they had a series of maintenance issues, which old aircraft can cause. Maintenance on old aircraft is also expensive, which is why big airlines like Ryanair go for new ones. Incidentally, Ryanair also started with aircraft up to 30 years old, but they've been a big buyer of new 737s for a while now. Having said that, budget airlines tend to push their aircraft quite hard so the resale value can be tiny.

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Ramridge 4th Sep '15 22 of 24

Hi Paul -
Re. Redde (LON:REDD). I have a holding in this stock and I hadn't picked up the large impact of tax credits on net profit & eps. Thank you for that.
On re-examining the accounts, it seems that the company have done the right thing by the book:
- they have included the impact of tax in their accounts of extraordinary items, and
- they are showing these tax credits which relate to ordinary activities in the profit & loss and eps calculations.
So the question is this: because these numbers are high, should they be normalised as you suggest?
Which makes me think, where do you draw the line? For example if a hypothetical company secures a fantastic contract which may not be repeatable and which boosts revenues by 20% say, would you then 'normalise' the revenue line on the grounds that it is just a one-off?
Just thinking.
Regards, Ram

Ps.  Six very high quality stock analyses in record time. Wow. You must have been on fire yesterday!

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hayashi22 4th Sep '15 23 of 24

Hadn't realised DTG planes were so old -makes you nervous to think that bits might fall off them -though no doubt maintenance is thorough. These new planes will no doubt be bought under some sort of leasing arrangement and should have lower running costs/less maintenance issues.

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cig 7th Sep '15 24 of 24

In reply to post #105841

They may lose revenue from freighters they rent the cargo space to though (a lot of air freight flies passenger jets).

Also law of physics issue: a circular section is the most efficient structure, and with that you can't do much better than the current layout without making the plane heavier/bigger (thus less efficient). They could perhaps change the floor to have below-foot-level cavities under seats without changing the structure of the aircraft, though that would add some extra weight.

Problem could also simply be solved by pricing it the way they did with hold luggage: have a two-size policy for cabin luggage, where small is free and large is not.

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About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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