News that Castlelake is contemplating a takeover bid for easyJet (LSE:EZJ) sent the orange airline’s shares soaring on 1 June. But how much is the group really worth?
There’s some evidence to suggest that it could be 85% undervalued. Others say its shares are too expensive. Let’s discuss.
Divided opinion
When the US investment firm let it be known that it was interested in buying Britain’s largest airline (in terms of passenger numbers), it clearly thought there was value in the company at around 400p.
It would also have been aware that when the news was announced, easyJet’s share price would go up, increasing its price tag.
However, it appears as though the majority in the City don’t consider the airline to be a bargain. Analysts have an average 12-month share price target of 430p. In other words, based on today’s (11 June) price, they think the group’s around 10% overvalued.
But there’s at least one notable exception. Earlier in June, Citi said the airline’s fleet was worth £4.25bn-£5.25bn, taking into account the age of its planes. When adjusted for cash and non-lease debt, the US investment bank said the group’s market-cap is 60%-85% lower than the value of its owned assets.
Admittedly, this back-of-the-envelope calculation isn’t intended to be too scientific. But it does suggest easyJet’s shares are somewhere between significantly, if not massively, undervalued. It could also draw others into a battle to own the group.
What now?
Castlelake has until 26 June to decide what it wants to do next. According to an Italian newspaper, it’s looking to partner with MSC, the world’s largest shipping group, to help fund a deal and ensure compliance with European Union ownership rules.
Understandably, easyJet’s board was dismissive. It described the approach as “highly opportunistic” given that the group’s share price was “temporarily depressed” due to the conflict in the Middle East.
The company’s directors pointed to the airline’s “investment grade” balance sheet and net cash position as evidence of its financial strength.
Buying shares due to takeover speculation isn’t a good idea. As easyJet warns: “There can be no certainty that an offer will be made…” Should Castlelake walk away, there could be a sharp drop in the airline’s share price.
And they might do this if they decide that the continuing blockade of the Strait of Hormuz — and the impact on jet fuel prices — could damage the aviation industry. They might also determine that they could better deploy their cash in industries where the return on capital is far higher.
My view
However, I believe easyJet has lots going for it. Indeed, its shares look to offer good value to me.
Flying to 163 airports in 37 countries (1,202 routes), it has a huge number of valuable slots. In addition, its package holiday business is doing well (I know, I’ve just returned from one). Also, its fleet of 356 planes is relatively young, with another 290 on order. In addition, it claims to have a lower per kilometre cost than Lufthansa, Air-France KLM, and International Consolidated Airlines.
The trouble is, I have finite cash resources. And yet there are so many UK shares that I like would like to own. I can’t buy them all. Even so, I believe easyJet’s a stock to consider.
Should you invest £5,000 in easyJet Plc right now?
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James Beard does not hold any positions in the companies mentioned.
