EasyJet slips after update but Shire climbs as deal concerns fade

Discussion in 'Market News' started by Lily, Apr 6, 2016.

  1. Lily

    Lily Forum Member

    Aug 29, 2015
    Likes Received:
    Shire recovers as analysts say US tax rules should not affect Baxalta plan

    As markets recover some ground following better than expected Chinese data and a revival in the oil price, easyJet shares have hit some turbulence.

    The budget airline is down 33p or 2% at £14.89 after it reported a 4.3% rise in March passenger numbers to 5.7m compared to the same time last year. But this represented slightly slower growth than in recent months and the load factor - the number of passengers as a proportion of the number of seats available - fell from 92.6% a year ago to 91.3%.

    While easyJet points to French strikes as a mitigating factor for March weakness, it is interesting to note that Ryanair did too and yet it still managed to post steady growth in both passenger numbers and loads.

    Shire has publically stated that they expect an ultimate group tax rate for [the merged company] of around 16.5%, some 3.5 percentage points below where we see the blended rate for the two standalone companies (20%). If we assume that profits from sales/costs synergies are taxed at 20%, and that the regular tax shield on additional debt is also at 20%, this implies other tax benefits of up to $260m by 2020 to get to the 16.5% group rate.

    If we assume that these extra savings are at risk from heightened US tax scrutiny this would reduce our proforma 2020 earnings per share from $7.05 to $6.76. These assumptions would delay accretion from 2017 to 2019 and move 2020 earnings per share accretion from 10% to 5%.

    Our overwhelming reaction to the [recent] results is of surprise that management appeared to have relatively few solutions. Even the terms used to describe the travails of the UK Directory spoke to a business that has moved from being amenable to management inputs/levers to one more or less reactive to market conditions.

    In a sense that is the issue here. There is plenty of opportunity to be exposed to beta in the General Retail sector but alpha is rare. Next has drifted out of the exclusive club. We have made modest reductions to profit forecasts which now assume full deployment of “surplus” cashflow to buy-backs. Our Fair Value is reduced by 2% from 6000p to 5900p reflecting Haitong earnings per share forecast changes.

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