The regional airline group Flybe has been having a rough time recently, mainly thanks to macroeconomic factors and tough competition. Since February the share price has declined an eye-watering 25%, is this the chance for a cheap purchase or a value trap?
At first glance the numbers seem attractive, currently trading on a P/E of 7.41 and a net tangible asset value of 63.61p, whilst share currently trade at the 38p mark. However, there are problems; the high turnover of senior management and poor operating margins. 2016 saw an operating margin of 1.51%, compared to -4.02% in 2015, an improvement but still lagging behind it’s peers. Yet growth is solid in terms of number of passengers flown.
The expected financial loss this year thanks to the updates needed to I.T. systems will be a drag in the short run, but should allow for a better business model in the longer term. The main focus for Flybe is concentrating on profitability, the infrastructure is in place, with a good fleet of aircraft and solid financing capabilities, with new contracts under way – such as the Eddie Stobart deal at the start of this year, should help Flybe shift towards better margins, with the new CEO eager to exploit every opportunity for growth.
With regards to the share price, since the mkt cap is relatively small for an airline, around £88 million, large swings are a daily occurrence and nothing to be concerned about. The long term prospects for the airline industry look promising, especially for Flybe.