Ryanair finds secret of growth

Uniq; Telecom Plus
Click to follow
The Independent Online

Ryanair, the remarkable no-frills Irish airline led by the loquacious Michael O'Leary, continues to soar, even while the giants of the industry sink into deep crisis. While the events of 11 September have been unmitigated bad news for the big national carriers, BA in particular, the cheapo operations are set to gain.

Ryanair, the remarkable no-frills Irish airline led by the loquacious Michael O'Leary, continues to soar, even while the giants of the industry sink into deep crisis. While the events of 11 September have been unmitigated bad news for the big national carriers, BA in particular, the cheapo operations are set to gain.

Ryanair yesterday reported that pre-tax profit, for the six months to 30 September, had improved from £56.1m last year to £75m. Net margins came in at an astonishing 26 per cent, up from 24 per cent last time – this from an airline that will fly you to Glasgow from London for 30p after tax.

The secret of Ryanair's success to date has been to fly within Europe to obscure airports at very low fares and literally create markets. "We're the airline that will fly you to places you didn't even know you wanted to go," Mr O'Leary said earlier this year.

It's an interesting psychological point – make it cheap enough and people will queue up to go anywhere. But how does Ryanair make money?

The airports it flies to are small with low landing charges. Crucially, a Ryanair plane can land, offload its passengers and take off again within 25 minutes at these airports. That keeps the planes engaged in revenue-earning activities longer than rivals.

Obviously, food and drink is not laid on inflight – you have to buy it at sky-high prices. And the company flogs you related services such as car hire and hotels, on which it does well. Commission-hungry travel agents have been cut out completely. Four-fifths of bookings are online, with the rest via a direct telephone booking line.

The current crisis in the airline industry has thrown up all manner of opportunities – even snooty airports in Switzerland are now begging for Ryanair to fly to them and you can bet it will screw some good deals out of them. Similarly with aeroplanes: the second-hand market is flooded and the likes of Boeing are offering very good terms for new planes. That means the current situation has actually improved Ryanair's growth prospects.

But it has also pushed the shares up substantially, and they were 12 per cent higher yesterday at 706p in London and 11.52 euros in Ireland. Deutsche Bank forecasts full-year earnings of 34 cents a share so, despite the good prospects, the stock is fully valued on a forward multiple of over 30 times.

Uniq

Uniq's interim results report yesterday started with an apology – and well it might. Nigel Stapleton, newly installed as chairman of the food group, told shareholders he is "well aware of their concerns about Uniq's performance and the impact that this has had on our share price". The company has disposed of its unloved dairy, pork and logistics businesses to focus on convenience foods and spreads – only to find them performing miserably, too.

Its attempt to restructure its four French units into one caused sales to plunge. And under-investment in advertising has caused its St Ivel yoghurts business to turn sour. Overall, profits from Uniq's ongoing businesses slipped 30 per cent in the six months to 29 September, while group losses increased tenfold to £28.5m.

Mr Stapleton says his new centralised regime will rationalise manufacturing across Europe and introduce continent-wide supply deals. Annual cost savings of £30m are promised but, given the number of management balls-ups of recent years and the continuing lack of a chief executive, it seems safer to wait before taking the figure at face value.

Institutional investors are not seen as likely to brave Uniq shares before the first shoots of recovery, which Mr Stapleton reckons will poke through in the spring. For the moment the stock is likely to be a plaything for the speculators. Pretty much the rest of the UK food industry is now in private hands and the possibility of a venture capital bid should limit the downside. But with full-year earnings from the ongoing business expected to be about 13p, the shares – down 6p to 142p – are only worth holding.

Telecom Plus

From 1987, Charles Wigoder built Peoples Phone into a giant mobile phone service by leasing network time from other mobile operators. When he sold it to Vodafone in 1996, it had 400,000 customers. Can he repeat the trick at Telecom Plus, where he is providing gas, electricity and phone services to 90,000 customers so far?

Results yesterday suggest he has the balance sheet strength and ruthless grip on costs that will be necessary to take Telecom Plus into the big league. A profit of £2m for the six months to 30 September was more than double the same period last year, allowing the company to quadruple the interim dividend to 2p, while still leaving £10m cash in the bank and no debt.

The company buys in bulk from the giant utilities so it can undercut household names like British Gas and BT. Telecom Plus customers are incentivised to bring in new business from friends and family, so the company itself has only tiny marketing costs. The licence to sell gas only came through last month, so a new push is only just beginning.

Peel Hunt, the house broker, predicts a full-year profit of £3.9m, rising to £4.5m the year after. That puts the shares, up 3.5p to 92p, on a rating no greater than the market average. They are cheap.

Comments