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Flybe Group Plc

Chris Oil Feature Article (LONG TERM HOLDINGS)

Flybe is the second of my recovery tips and part of my private investment holdings, a perfect hedge for anyone with large oil investments or a recovery play in its own right.

A little about Flybe Group, it is UK based and is Europe’s largest regional airline company with flying operations based out of Britain and Finland operating through joint Finnair Oyi fleet, having 96 aircraft based on the last set of accounts. Yesterday’s news release showed the cancellation of 20 E175 jets and will instead bolster its fleet with 24 Q400 jets which are more suitable aircraft to fit their “fleet replacement and growth profile.” The move gets Flybe planes that are more suited to the current and future route network and is another step forward in the resolution of its legacy issues. “We are committed to flying the right aircraft on the right routes,” CEO Hammad said in the statement. “Our core UK branded fleet is now right-sized to our capacity growth and aircraft renewal plans at a net cost broadly in line with our expectations.”

Why am I so excited? With major expansion plans at London City Airport and new routes launched October 27th to Exeter, new flights in Manchester combined with existing destinations should exceed three quarters of a million passengers in 2015. In number crunching terms, broker forecasts expect £592m revenue with a £20m profit for the period to 31 March 2015 putting it on a PE of around 16. The following year £629m revenue with a profit of £50m drops the PE to just 6.3, that’s 150% increase in earnings and long term, I think it’s another Easyjet in the making and again has lower risk than any oil plays.

So why so cheap? Well the firm nearly went bust under the last management however the balance sheet has been sorted post last issue of £150m cash at £1.10 providing a floor in the share price, now making the company one of the best financed businesses around today. The aim is to deploy capital to own aircraft with secured loans rather than full operating leases together with the company’s maintenance business (MRO) services which repairs its fleet with third party customers.

Given the new management are ex-Easyjet they know exactly what to do to recover the Flybe business to historical highs. This is a real turnaround situation on multiple fronts, cutting unprofitable routes, cutting staff numbers and closing bases all leading to £70m a year cost savings.

I have been to a few presentations and CEO Saad Hammad wants to turn everything purple plus a 60 minute promise on delayed flights increasing repeat business and a niche against other airlines. The TV adverts are getting more exposure as well which all helps increase the brand with customers feeding through to the bottom line.

Other aspects, a cost review on the training school which I hope they will float off or semi-privatise to reduce costs and increase cash. While the (MRO) maintenance group will be kept as I cannot see its worthwhile considering the financial benefits of maintaining the company’s fleet. Nobody is going to be cheaper via a rival.

Initial dividend of 1% upwards is forecasted from March 2016 onwards so you could gain a significant income by investing now, remember the large holding today versus down the road.

Lastly Flybe is hedged 60% and is benefiting from the downturn in oil prices on the 40% market price which should show in the profitable numbers come next results. As for chances of war in the long term remember this is mainly an internal airline so currency or conflict abroad has less effect than any other airline however the advantage of this sector is its cash producing abilities and growth prospects with Flybe in number one position.

Until the next time more ramblings from the castle can be seen @chrisoil

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