RYANAIR HOLDINGS PLC COMPANY REPORT · Ryanair will be the airliner with the largest investment in...

34
THIS REPORT WAS PREPARED BY “STUDENTS NAME”, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT) See more information at WWW.NOVASBE.PT Page 1/34 MASTERS IN FINANCE EQUITY RESEARCH 65.5% 6.1% Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 52-week cumulative return: Ryanair vs MSCI Europe RYA LN Equity MXEU Index The European aviation market is in a turning point. The flag carriers, which at the beginning of the century dominated the European air space, are majorly under austere restructuring processes due to overlong operational inefficiencies, large debt burdens and massive personnel costs. As a consequence, these airliners are cutting back capacity and rethinking the traditional business model for the short-haul segment. Meanwhile, the low- cost carriers display financial capability to make significant investments in fleet to both accommodate the expected growth in passengers at their current routes and to penetrate where flag carriers are reducing capacity. Ryanair will be the airliner with the largest investment in fleet with over 350 aircrafts to be delivered during the next nine years. Following the restructuring process of Lufthansa and Air Berlin, Ryanair will be adding significant capacity to Germany’s domestic and international markets. Other markets, such as Scandinavia and Central/Eastern Europe are also likely to be key to the expansion of the ultra-low cost carrier, while it will consolidate its market leader position in Southern Europe. Company description Ryanair is Europe’s largest airliner with over 90 million passengers carried in fiscal 2015. The carrier operates a comprehensive network of routes across 31 countries with a fleet of more than 300 B737-800 aircrafts. The very efficient cost structure allows Ryanair to offer the lowest average fares in the market, which have an implicit discount of 40% to its closest competitors in Western Europe. The airliner will surpass the 100 million passengers carried this fiscal year and it plans to carry 180 million passengers by 2024. Ryanair has in place orders for additional Boeing 737-800 and the new Boeing 737 MAX 200s, which will increase the fleet to 520 aircrafts in 2024. RYANAIR HOLDINGS PLC COMPANY REPORT AIRLINES INDUSTRY 8 JANUARY 2016 STUDENT: ANTÓNIO CALEIA [email protected] European aviation market in a restructuring process Low-cost carriers with a competitive edge Recommendation: BUY Vs Previous Recommendation - Price Target FY16: 23.72Vs Previous Price Target - Price (as of 5-Jan-2016) 15.00 52-week range (€) 9.04-15.30 Market Cap (M€) 19,723.85 Outstanding Shares (M) 1,319.3 Source: Bloomberg Source: Bloomberg (Values in € millions) FY 2015 A FY 2016 E FY 2017 F Revenues 5,654 6,465 7,135x EBITDAR 1,530 1,985 2,561 EBITDAR Margin (%) 27.1% 30.7% 35.9% Net Income 867 1,221 1,623 EPS (€) 0.63 0.91 1.21 Net Debt (256) (317) 157 Net Debt/EBITDA -0.18x -0.17x 0.06x P/E 20.5x 22.3x 25.6x ROE 21.5% 30.9% 37.2% ROA 8.1% 11.9% 14.3% Source: Ryanair reports and Nova Research Team

Transcript of RYANAIR HOLDINGS PLC COMPANY REPORT · Ryanair will be the airliner with the largest investment in...

Page 1: RYANAIR HOLDINGS PLC COMPANY REPORT · Ryanair will be the airliner with the largest investment in fleet with over 350 aircrafts to be delivered during the next nine years. Following

THIS REPORT WAS PREPARED BY “STUDENT’S NAME”, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND

ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE

VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)

See more information at WWW.NOVASBE.PT Page 1/34

MASTERS IN FINANCE

EQUITY RESEARCH

65.5%

6.1%

Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15

52-week cumulative return: Ryanair vs MSCI Europe

RYA LN Equity MXEU Index

The European aviation market is in a turning point. The flag

carriers, which at the beginning of the century dominated the

European air space, are majorly under austere restructuring

processes due to overlong operational inefficiencies, large debt

burdens and massive personnel costs. As a consequence, these

airliners are cutting back capacity and rethinking the traditional

business model for the short-haul segment. Meanwhile, the low-

cost carriers display financial capability to make significant

investments in fleet to both accommodate the expected growth in

passengers at their current routes and to penetrate where flag

carriers are reducing capacity.

Ryanair will be the airliner with the largest investment in fleet with

over 350 aircrafts to be delivered during the next nine years.

Following the restructuring process of Lufthansa and Air Berlin,

Ryanair will be adding significant capacity to Germany’s domestic

and international markets. Other markets, such as Scandinavia

and Central/Eastern Europe are also likely to be key to the

expansion of the ultra-low cost carrier, while it will consolidate its

market leader position in Southern Europe.

Company description

Ryanair is Europe’s largest airliner with over 90 million passengers carried in fiscal 2015. The carrier operates a comprehensive network of routes across 31 countries with a fleet of more than 300 B737-800 aircrafts. The very efficient cost structure allows Ryanair to offer the lowest average fares in the market, which have an implicit discount of 40% to its closest competitors in Western Europe. The airliner will surpass the 100 million passengers carried this fiscal year and it plans to carry 180 million passengers by 2024. Ryanair has in place orders for additional Boeing 737-800 and the new Boeing 737 MAX 200s, which will increase the fleet to 520 aircrafts in 2024.

RYANAIR HOLDINGS PLC COMPANY REPORT

AIRLINES INDUSTRY 8 JANUARY 2016

STUDENT: ANTÓNIO CALEIA [email protected]

European aviation market in a restructuring process

Low-cost carriers with a competitive edge

Recommendation: BUY

Vs Previous Recommendation -

Price Target FY16: 23.72€

Vs Previous Price Target -

Price (as of 5-Jan-2016) 15.00 €

52-week range (€) 9.04-15.30

Market Cap (M€) 19,723.85

Outstanding Shares (M) 1,319.3

Source: Bloomberg

Source: Bloomberg

(Values in € millions) FY

2015 A FY

2016 E FY

2017 F

Revenues 5,654 6,465 7,135x

EBITDAR 1,530 1,985 2,561

EBITDAR Margin (%) 27.1% 30.7% 35.9%

Net Income 867 1,221 1,623

EPS (€) 0.63 0.91 1.21

Net Debt (256) (317) 157

Net Debt/EBITDA -0.18x -0.17x 0.06x

P/E 20.5x 22.3x 25.6x

ROE 21.5% 30.9% 37.2%

ROA 8.1% 11.9% 14.3%

Source: Ryanair reports and Nova Research Team

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Table of Contents

EXECUTIVE SUMMARY .......................................................................... 3

EUROPEAN AVIATION MARKET AT A GLANCE .................................. 4

RYANAIR HOLDINGS PLC: OVERVIEW ................................................. 5

SHAREHOLDER STRUCTURE ............................................................... 7

GROUP STRUCTURE .............................................................................. 7

RYANAIR’S REVENUES .......................................................................... 8

RYANAIR’S COSTS ................................................................................. 9

FINANCING OF AIRCRAFTS ACQUISITION..........................................10

HEDGING ................................................................................................11

RYANAIR’S STRATEGY .........................................................................12

GERMANY ............................................................................................................ 13 NORTHERN EUROPE ........................................................................................... 13 GREECE .............................................................................................................. 14 CENTRAL AND EASTERN EUROPE ...................................................................... 15

VALUATION ............................................................................................16

INCOME STATEMENT ........................................................................................... 16 BALANCE SHEET ................................................................................................. 21 UNLEVERED FREE CASH FLOW (UFCF)............................................................ 23 DISCOUNT RATE .................................................................................................. 24 ENTERPRISE VALUE, EQUITY VALUE AND VALUE PER SHARE .......................... 25 SENSITIVITY ANALYSIS ........................................................................................ 26 VALUING AN OPPORTUNITY: TRANSATLANTIC ROUTES ...................................... 27

FINANCIALS AND VALUATION KPIS ....................................................32

DISCLOSURES AND DISCLAIMER .......................................................34

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1.09 1.12 1.15 1.18 1.21 1.24 1.28 1.30 1.33 1.35

8.3%9.4%

10.4% 10.8% 11.2% 11.4%12.1% 12.4% 12.6% 12.6%

FY2015

FY2016

FY2017

FY2018

FY2019

FY2020

FY2021

FY2022

FY2023

FY2024

Number of passengers intra-European aviation market (in B)*

Ryanair market share

Source: Eurostat, Eurocontrol and Nova Research Tem*It does not include Turkey and Russia

668 839 6771,786

(460) (790)(1,537)

(382)

1,848

(6,000)

(4,500)

(3,000)

(1,500)

-

1,500

3,000

FY2016

FY2017

FY2018

FY2019

FY2020

FY2021

FY2022

FY2023

FY2024

EBIT Cash Taxes Δ NWC CAPEX Unlevered FCF

Values in M€Source: Nova Research Team

6%

11%

15%

19%17% 17%

13%11%

9%8%

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

WACC ROIC

Source: Nova Research Team

14.29

20.98

23.56

19.37

18.31

21.36

19.51

18.01

42.97

25.62

23.87

29.61

23.72

25.32

27.11

28.55

Beta of the industry

Average fare elasticity

Load factor coefficient

Terminal value

Aircraft price discounts

Route Charges

Airport and Handling…

Oil price

Source: Nova Research Team

2,179

31,558 31,395 31,70729,379

(163)

312

-5,000

10,00015,00020,00025,00030,00035,00040,00045,00050,000

Source: Nova Research Team

Executive Summary

Ryanair is expected to increase its market share in the intra-European air

transportation market (excluding Russia and Turkey) from 8.3% as of

fiscal 2015 to 12.6% as of fiscal 2024.

The airliner has on order 364 aircrafts (including options), which will be

allocated in the short-term majorly to Germany’s domestic and

international markets. In addition, Ryanair is predicted to increase its

presence in Scandinavia, Greece and Central/Eastern Europe during the

next decade.

Nova Research Team expects that the airliner will carry 170 million

passengers by fiscal 2024, below management team projections of 180

million. For fiscal 2016, Ryanair is on track to carry 105 million

passengers.

From fiscal 2020 to fiscal 2023 Ryanair is expected to display a negative

Unlevered Free Cash Flow (UFCF) due to the acquisition of 163 aircrafts

at total cost estimated to be around 17 B€.

Despite the negative UFCF, this investment in CAPEX creates value to

shareholders since the ROIC continues to be higher than the airliner’s

cost of capital during the period.

Since a significant part of the investment in fleet will be made to replace

existing less efficient aircrafts, mainly after fiscal 2020, the annual growth

in seat capacity will start to slow down and so will operating revenues.

Consequently, the ROIC will decrease towards the WACC from fiscal

2020 ownwards.

In perpetuity, Nova Research Team expects the ROIC to be equal to

Ryanair’s cost of capital, since the airliner is not likely to hold its cost

advantage indefinitely. From fiscal 2024 onwards, Nova Research Team

expects that Ryanair grows annually by 1.5%.

An equity value as for the beginning of fiscal 2017 of 31.7 B€ and a value per share of €23.72 was reached.

At last, it was performed sensitivity analysis and computed confidence intervals for various parameters used in the valuation model.

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16.5%

29.5%34.0% 35.8%

39.6%

2004 2008 2010 2012 2014

Source: CAPA

Graph I:LCCs share of total seats in Europe

9.604 9.7510.039

10.3110.588

10.85211.166

11.397

1.7% 1.5%

3.0% 2.7% 2.7% 2.5% 2.9%2.1%

0.0%1.0%2.0%3.0%4.0%5.0%6.0%7.0%8.0%9.0%10.0%

8.5

9

9.5

10

10.5

11

11.5

12

2014A 2015E 2016F 2017F 2018F 2019F 2020F 2021F

IFR Flight Movement (in K) Annual growth

Source: Eurocontrol

Graph II:Forecast of flight movements in Europe*

*departures and arrivals in Europe (excluding Russia) using instrument flight rules

European aviation market at a glance

In the past the European aviation market was characterized by strict regulations,

the domination of flag carriers and a large portion of state-owned airports. All

these features together contributed to the fragmentation of the European air into

national markets, which in turn sustained low competition. Following the Single

European Act of 1986, it was created in the 90s a Single Aviation Market for the

EU countries, which removed all commercial restrictions for airliners travelling

within the region.

The aforementioned deregulation greatly contributed to the strong growth in air

transportation in Europe over the last two decades and enabled the expansion of

the low-cost segment. Airliners such as Ryanair, EasyJet and Norwegian have

been consistently gaining market share in the intra-European market at the cost

of the legacy carriers, which have been either going bankrupt or integrating1.

Looking forward to improve efficiency and profitability margins, big airliners such

as Air France and KLM and Iberia and British Airways have merged2. In addition,

Lufthansa enlarged its passengers group by acquiring Austrian Airlines and

Swiss3 and, more recently International Airlines Group acquired Aer Lingus.

Alongside the bankruptcies and merges/acquisitions, the enlargement of

international alliances has been consolidating the European air travelling market.

The recovery of Europe from the financial crisis and the posterior debt crisis will

impact positively the demand for air travelling in the region. In the short-term, the

number of flights in Europe is expected to grow by 1.5% and 3% in 2015 and

2016, respectively. After 2016, the traffic growth is expected to stabilize at around

2.5% with Turkey being the main contributor upon the opening of the new airport

in Istanbul in October 2017. However, Europe will face a capacity constraint that

will restrict the growth in air traffic. For example, in 2021, 200,000 flights will not

1 These new groups benefit from cuts in overheads, higher presence in core markets and from an extension of routes and capacity. Ultimately, this integration shall improve efficiency towards the competitors’ levels: low-cost carriers in the intra-Europe market and Gulf carriers in the long-haul segment.

2Air France and KLM merged in 2004. Despite the operational figures of Air France being consistently below KLM’s, until the financial crisis the merger was successful with the combined operating margin increasing from ~3% as of fiscal 2004 to ~6% as of fiscal 2008. Although the group has returned to a profit in fiscal 2011, it has been unable to reach pre-crisis operating margins. Consequently, in 2014 a restructuring plan was launched, which targeted to reduce the Group’s unit costs between 1% and 1.5% per annum. This restructuring has been hard to implement due to the negotiations with the labour unions.

British Airways (BA) and Iberia merged in 2011 and formed the International Airlines Group. A restructuring plan was launched for Iberia in the following year given the very different operational efficiencies between the airliners. In opposition to Air France-KLM Group, this restructuring process has been successful with a reduction of more than 4,500 jobs and a significant improvement of operational metrics by Iberia. Overall, the group has improved operational margins from 3.3% in 2011 to 5.5% in 2014. Nevertheless, an operational gap still persists between BA and Iberia. Aer Lingus acquisition impact cannot be measured yet given the few time passed by since the integration of the airliner in the group.

3 These mergers were successful in expanding Lufthansa’s international network. However, the group is currently confronting a problem with a large pension deficit.

Single Aviation Market – no commercial restrictions in the European air space …

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364

323

242

239

209

127

100

69

56

48

Ryanair

easyJet

Norwegian

Wizz Air

Turkish Airlines

Lufthansa

Pegasus…

Aeroloft

Vueling

Sun Express

Graph IV:Top 10 Euopean airliners by narrow body aircrafts

expected deliveries

Source: CAPA, July 2015*It includes options

245

297256 238

217238

157124

60

2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: CAPA, July 2015*It includes options

Graph III:Narrow body aircraft projected deliveries in Europe*

41.5

64.8

77.5

77.5

90.6

Source: Companies last annual fillingsThe figures presented correspond to the total passengers carried by each arliner (includes extra EU). Lufthansa does not include Austrian Arlines and Swiss.

Graph V:Largest European airliners (million passengers)

take-off due to the lack of capacity in European airports, which represents a

reduction in the potential growth of 1.7%4.

European airliners will face additional challenges in this new growth spurt.

Besides the competition from Gulf airliners in the long-haul segment and the

pressure to be cost efficient, European airliners are now faced with the pressure

to renew their fleet as concerns about the noise and fuel consumption increase.

In addition, LCCs5 are faced with the challenge to continue the expansion into

regional and secondary airports without cannibalizing existing revenues and

extend their network of primary airports keeping their low-fares policy.

Furthermore, an intensification of the competition is expected in the short-haul

segment as the narrow body fleet operating in the region increases and as the

legacy carriers begin to adopt a hybrid business model.

Big question marks still persist on how supranational institutions and national

government will increase airports capacity and on how air traffic in the European

sky will be managed in the next decades. Studies on the possibility of a Single

European Sky (i.e. like in the US) have shown some progress but it is still far

from reaching the transference of the air traffic management from national level

to supranational institutions due to States’ reluctance to lose supremacy on this

matter. In addition, a simpler and more efficient regulatory structure, lower

charges at monopoly airports and lower tax burden on passengers are topics on

the agenda of European Commission to be discussed in the next years.

Ryanair Holdings PLC: Overview

Ryanair is an ultra-low-cost airliner operating frequent point-to-point services

across Europe and North Africa. Currently it is the biggest European airliner by

number of passengers, with 91 million passengers carried in fiscal 2015 and on

track to reach 105 million passengers in fiscal 2016. Ryanair operates more than

1,600 daily flights from 76 bases that connect 197 destinations. The airliner holds

a fleet of more than 300 Boeing 737-800 which is expected to increase to 520

aircrafts in fiscal 2024. According to the management team, by that time Ryanair

will carry c. 180 million passengers, double the amount of passengers flying with

the airliner today.

4 Source: Eurocontrol seven-year forecast, September 2015. Nova Research Team believes that the impact of these airport restrictions on the value of Ryanair will be negligible. Ryanair flies from/to airports without slot requirements and the airliner current expansion plan leaves aside Europe’s mega hubs. Therefore, Ryanair is unlikely to face major capacity constraints. The impact of the airport lack of capacity will be felt by other airliners operating mainly from European hubs (e.g. KLM, Air France, British Airways and Lufthansa). Given the excess demand, two non-mutually exclusive scenarios are possible to occur: a growing demand for alternative means of transportation (e.g. high speed trains) or a shift of demand to regional airports. The latter scenario was not incorporated in Ryanair’s price recommendation. 5 Low cost carriers.

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41

52 50

29

39 4249

45

25

FY2016

FY2017

FY2018

FY2019

FY2020

FY2021

FY2022

FY2023

FY2024

Graph VI:Ryanair aircraft deliveries*

Source: Ryanair annual reports*It includes options

More recently, as Ryanair looks to attract more business travellers and as flag

carriers reduce the traffic at their primary airports due to the restructuring

processes, the airliner has been expanding its network of primary airports,

namely Warsaw, Athens, Lisbon, Glasgow International, Cologne/Bonn,

Copenhagen and Berlin. Michael O’Leary, Ryanair’s CEO, expects that half of

the growth in the next five years will come from the primary airports.

Nonetheless, the core business of Ryanair is still to offer frequent direct

connections to secondary and regional airports near major population centres

and travel destinations. This strategy allows the airliner to benefit from lower

landing and handling fees, faster turnarounds and higher on-time departures. In

addition, these airports do not maintain slot requirements that limit the number of

allowed take-offs and landings.

In order to keep maintenance and personnel training cost low and to leverage its

position with Boeing, Ryanair has a policy of purchasing a single aircraft model.

The airliner has ordered 380 Boeing aircraft6, of which 200 (including 100 aircraft

option) are the new Boeing 737 Max 200 that will increase the seating capacity

by 11 to 200 seats as well as reducing the oil consumption by 18% and the noise

by 40%. The latter aspects will become valuable assets to Ryanair as the

environmental concerns on the industry increase.

In the beginning of fiscal 2015, following the reputation of a less-friendly

customer service and after various lawsuits by customers, Ryanair launched the

“Always Getting Better” program. The airliner adopted a quiet flight policy in dawn

and night flights, the allocation of seats, the possibility to carry a second bag for

free and it cut on airport and luggage fees. Ryanair introduce also new packages

at a discount for business travellers and families.

Although Ryanair’s current strategy is to grow organically, the airliner has made

some acquisitions in the past. In 2003 it acquired the LCC Buzz from KLM, which

increase its presence at London Stansted and allowed for the immediate access

to 11 French regional airports. Following the privation of Aer Lingus in 2006,

Ryanair acquired a stake of 29.8% in the Irish company. The airliner tried to

enlarge its ownership at various times but it was stopped either by Aer Lingus’

shareholders that considered the offer too low or by EU competition authorities.

In July of this fiscal year, Ryanair agreed to sell its position in Aer Lingus to IAG

for 400 M€7.

6 As of 1st April 2015. 7 Ryanair paid 407 M€ for its stake in Aer Lingus and received 18 M€ in dividends during the nine years holding period. This means that Ryanair made a small profit in its investment in Aer Lingus.

Secondary airports enable lower airport charges, faster turnarounds and higher on-time departures …

Heathrow, Charles de Gaulle and Frankfurt Main are out of Ryanair’s radar of primary airports…

Ryanair’s M&A activity…

Improving customer experience through AGB program …

Increasing number of primary airports served …

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6.1%6.0%

3.8%

3.2%

4.1%

4.2%

72.7%

Graph VII: Ryanair's shareholder structure

HSBC HOLDINGS PLC

FIDELITY INVESTMENTS

O'LEARY MICHAEL

STANDARD LIFE INVESTMENTS

BAILLIE GIFFORD

BLACKROCK

OTHERS

Source: BloombergNote: As of 31st December 2015

Shareholder Structure

As of 31st December 2015, Ryanair had 1,319.32 M one-class ordinary shares

outstanding, of which 4% were held by its directors and executive officers, where

special emphasis goes to the Ryanair’s CEO, Michael O’Leary, with a stake of

3.8%. The remaining 96% were trading in the market. At the same date, the

airliner had 17.7 M share options outstanding with a weighted average exercise

price of 6.94€ (in-the-money) and a weighted average maturity of 6 years.

Therefore, the airliner has 1,337.02 M diluted shares8.

Ryanair shares are majorly held by investment groups, which have a jointly

shareholding of 85.7%. Moreover, the shares are traded in the Irish Stock

Exchange, in the London Stock Exchange and in the NASDAQ through ADRs.

The airliner distributes frequently returns to its shareholders both through special

dividends and share buybacks. Since fiscal year 2008 the firm has returned to its

shareholders a total amount of 2,934 M€, of which 1,422 M€ correspond to share

buybacks and €1,512 M€ correspond to special dividends. Following the sale of

the 29.8% stake in Aer Lingus, Ryanair will distribute in fiscal 2016 an additional

400 M€ to shareholders.

Group Structure

Ryanair Holdings PLC

Ryanair Ltd

Aircraft Branding Ltd

Airport Marketing Services Ltd

Aviation Risk Holdings BV

East Midlands Training Ltd

FR Finance BV

Coinside Ltd

Darley Investments Ltd

FR Hangars Ltd

IM Aviation Risk Holdings Ltd

FRC Investments Ltd

Prestwick Aero Ltd

Ryanair UK Ltd

Ryanair.com Ltd

Mazine Ltd

Ryanair Ltd

Note: Ryanair is the full owner of all the subsidiaries, except Mazine Ldt where it holds a stake of 75%

8In the calculation of the Ryanair’s value per share (in the next section), it was used the diluted number of shares.

Ryanair has a complex group structure with various subsidiaries providing complementary services to the core business, such as financing, marketing and training activities. Since we do not have individual accounts for these subsidiaries and as the weight of these operations in the activity of the group is negligible, Nova Research Team looked at the group as a whole (i.e. Ryanair Holdings PLC).

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0%

20%

40%

60%

80%

100%

0

500

1000

1500

2000

2500

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

FY 2013 FY 2014 FY 2015

Revenues (in M€) Load Factor

Source: Ryanair Reports and Website*It includes scheduled and ancillary revenues

Graph VIII:Ryanair's quarterly revenue* and load factor

75%

21%

2%2%

Graph IX:Ryanair's revenues composition

Scheduled revenues

Non-flight scheduled

In-flight sales

Internet-related

Source: Ryanair Annual Report 2015

FY 2015 FY 2014 FY 2013 FY 2014 FY 2013 FY 2012

Average fare (in €) 47 46 48 89 83 80

Load Factor 88% 83% 82% 91% 89% 89%1FY starts in April 2FY starts in October

Ryanair1 EasyJet2

Ryanair’s revenues

As for the whole intra-European air transportation industry, Ryanair revenues are

characterized by seasonality along the year with a peak during the second quarter

and a low during the fourth quarter (i.e. summer and winter, respectively).

Furthermore, the air travelling business is dependent on the overall economic

performance.

Unlike legacy carriers that rely heavily on the sale of the tickets, the LCCs

business model relies both on the sale of tickets and ancillary revenues. These

consist in revenues from non-flight scheduled operations, including revenues from

excess baggage charges, priority boarding and reserved seating, in-flight sales of

beverages, food and merchandise and Internet-related services (i.e. consisting of

commissions of products/services sold through Ryanair’s platforms such as car

rental, accommodation or travel insurance).

Finally, Ryanair has a “load factor active/price passive” strategy regarding

revenues, meaning that its primary goal is to fill in the airplane as much as

possible even if that comes at a cost of a lower fare charged9. In the previous

fiscal year, Ryanair charged on average 47 € per ticket which granted a load factor

rate of 88%. Ryanair has consistently had the lowest fares amongst the European

airliners, however, due to its policy of flying to secondary and regional airports,

where the demand is more elastic, its load factors have not been as high as the

main competitor, EasyJet, which has a larger network of primary airports.

Table I: Historical average fare and load factor of Ryanair compared to main competitor, EasyJet

Source: Companies annual reports

A new threat in terms of efficiency is arising from Eastern Europe. Despite the

slightly higher airfare charged (48€ as of fiscal 2015), Wizz Air displays the lowest

average yield per mile among European airliners (5.0 euro cents against 6.1 euro

cents of Ryanair). Wizz Air will expand its fleet by 239 aircrafts in the next years

and it will be Ryanair’s number one competitor in routes intra-Eastern/Central

Europe and routes connecting the region to Western Europe.

9 The rational for this policy is that the marginal revenue (airfare plus additional ancillary revenues) is higher than the marginal cost for any aircraft capacity. Therefore, it is optimal to have 100% load factor.

Wizz Air – a new threat for Ryanair…

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0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

2011 2012 2013 2014 2015

Graph X:Fuel Costs as a percentage of operating costs

Air France EasyJet

IAG Ryanair

Source: FT Research

Ryanair1 EasyJet2 Norwegian3 Wizz Air1 IAG3 Lufthansa3 Air France -

KLM3

FY 2015 FY 2015 FY 2014 FY 2015 FY 2014 FY 2014 FY 2016

Average yield per mile (in € cents) 6.1 12.5 8.3 5.0 14.2 17.5 17.5

Load Factor 88.0% 91.5% 80.9% 86.7% 80.4% 80.1% 84.7%1FY starts in April 2FY starts in October 3FY starts in January

Source: Companies annual reports

Ryanair1 EasyJet2 Norwegian3 Wizz Air1 IAG3 Lufthansa3 Air France -

KLM3

FY 2015 FY 2015 FY 2014 FY 2015 FY 2014 FY 2014 FY 2016

Staff 6 9 15 5 59 69 94

Airport & Handling 8 21 14 18 27 50 43

Route Charges 6 6 8 - 20 - -

Ownership & Maintenance 7 8 21 14 38 23 51

Marketing, distribution and other 3 7 4 3 26 91 50

Total cost excluding fuel per

passenger (in €)29 51 62 40 170 233 238

CASM (in € cents) 5.77 9.28 8.67 5.82 12.23 18.86 14.891FY starts in April 2FY starts in October 3FY starts in January

Source: Companies annual reports

Table II: Selected European airliners average yield per mile and load factor

Ryanair’s costs10

The success of Ryanair’s business model depends on its ability to control costs.

This enables the airliner to persistently have the lowest cost structure in the

industry and thus offer the lowest fares while maintaining a profit. However, the

most significant cost for airliners, which is the jet fuel, cannot be totally controlled.

Hence, Ryanair has to have some degree of flexibility on the other operating costs

such for instance when the price of fuel increases it is possible to cut elsewhere in

order to keep its low fares without affecting significantly the earnings. The same is

true when the price decreases sharply since Ryanair hedges on average 90% of

the expected fuel consumption. As competitors benefit from lower operating costs,

the airfares in the market will tend to decrease and, hence, Ryanair needs to have

flexibility in the costs to compete with those lower fares. Moreover, as Ryanair has

the lowest cost per passenger after fuel expenses, the fuel represents a higher

portion of the total operating expenses. Due to this, Ryanair profits would be more

sensible to changes in jet fuel price if it was not for its almost full hedging policy. 11

Table III: Selected European airliners operating costs and cost per available seat mile (CASM)

10 For the LCCs (i.e. Ryanair, EasyJet, Norwegian and Wizz Air) the yield corresponds only to the scheduled revenue divided by the revenue passenger miles. For the other (flag carriers) it is not possible to make the split between scheduled and ancillary revenues and, hence, it was used the total revenue to compute the yield. 11 For Wizz Air, Lufthansa and Air France-KLM Group it was not possible to split between airport and handling and en-route charges. The values for Norwegian, IAG, Lufthansa and Air France KLM include long-haul. As a large portion of the flight cost is in landing and taking-off the aircraft, the cost for these airliners is undervalued when compared to the other airliners with shorter average length of passenger haul.

10

11

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43.2%

15.5%

11.9%

10.9%

8.2%

5.1%

2.9%2.4%

Graph XI:Ryanair's cost structure

Fuel and oil

Airport and handling charges

Route charges

Staff costs

Depreciation

Marketing, distribution and other

Maintenance, materials and repairs

Aircraft rentals

Source: Ryanair Annual Report 2015

The charges paid to use the airport facilities and handling services are also

important for Ryanair cost management. These charges are expected to increase

due to Ryanair’s plan to serve more primary airports. Similarly important are the

route charges paid for the air traffic management services. If the Single European

Sky initiative is successful the air traffic management services will have a much

lower cost to the providers of the service, which may in turn be reflected in lower

charges per mile. However, Nova Research Team cannot perceive how likely this

scenario is, since there has been ongoing debate on the matter for many years but

few progress was made. Therefore, for valuation purposes this scenario was not

taken into account.

Labour costs represent a substantial percentage of Ryanair costs and they have a

crucial characteristic for the success of the low-cost business model that is being

considerably flexible and controllable. Ryanair staff is expected to increase from

below 10 million employees in fiscal 2015 to over 16 million employees by fiscal

2024. Regarding staff costs, at the beginning of fiscal 2016 the airliner increased

the salaries by 2%. From fiscal 2017 onwards the average annual staff cost is

expected to be adjusted to take into account the inflation of the period.

Amongst the low cost carriers Ryanair is the airliner that displays lower cost per

passenger excluding fuel expenses. The biggest challenge for Ryanair in the

medium-long term is to sustain this cost advantage as it expands its routes to

primary airports and as the concerns regarding its working policies increase.

Further EU regulation on the employees’ rights can also increase considerably the

labour costs. On the other hand, the expectation of lower route charges, the

increasing pressure of airliners on supranational institutions to regulate the airport

charges, mainly in monopoly airports, and the trend towards the abolishment of air

travel tax may more than outweigh the increase in the aforementioned costs.

Financing of aircrafts acquisition

At the end of FY 2015 Ryanair had a fleet of 308 Boeing 737-200 aircraft, the

majority financed through the US Export-Import Bank guaranteed loans (202

aircrafts). Other source of financial leasing the airliner uses is the Japanese

Operating Leases with a call options (FY 2015: 26 aircrafts) that gives Ryanair the

right to acquire the aircraft at a predetermined price after 10.5 years. In addition, in

order to reduce the acquisition costs and allow for more financial flexibility,

Ryanair sells and leasebacks some aircrafts delivered by Boeing (FY 2015: 51

aircrafts). Another financing instrument issued but not so common is the issuance

of bonds. More recently, the firm has issued unsecured Eurobond that enabled it

to raise from the market €1.7 billion at a blended interest rate of 1.5%. At last, in a

US Ex-Im Bank guaranteed loans – the base of aircraft financing …

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FY 2016 FY 2017 FY 2015 FY 2016 FY 2015 FY 2016 FY 2015 FY 2016

Fuel

Hedging 95% 95% 80% 58% 27% 2% 0% 10%

1FY starts in April 2FY starts in October 3FY starts in January

Source: Companies annual reports

Southwest Airlines3Ryanair1 EasyJet2 Norwegian3

234 211 212 231 219 218 225 220 207 195

11 44 56 56 56 56 56 56 56 5651 51 51 51 51 51 51 51 51 5112 34 49

64 94 126 136 162 195 218308

340368

402 420451 468 489 509 520

-

100

200

300

400

500

600

FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

Graph XII:Ryanair's projected aircraft financing instruments

No. of aircraft with debt Remaining Financed with Ryanair's own resources

Operational Leasing - Sale-and-Leaseback No Outstanding Debt Remaining

Source: Nova Research Team

lower proportion of the total number of purchases the airliner uses commercial

debt financing (FY 2015: 6 aircrafts).

Ryanair’s strategy to finance most of its aircraft acquisitions through the U.S.

Export-Import Bank enables the airliner to enjoy below-market average interest

rates and so reduce the financial expenses. In addition, the unusual issuance of

the Eurobond took advantage of historically low interest rates, which in turn will

reduce the future interest cost for the airliner. Lastly, the sale and leaseback of

aircrafts delivers liquidity in the short-term, however, unlike the abovementioned

instruments, it does not create any value to the company when compared to

equivalent debt instruments12.

Hedging

Ryanair has a very active hedging policy regarding the oil price. Historically, the

company has used jet fuel forwards to hedge between 70% and 90% of the

forecasted annual fuel consumption. For fiscal year 2016, the airliner has locked in

95% of the forecasted fuel consumption at $930 per metric ton and, for fiscal year

2017, it has already locked in 95% at $622 pmt. Even though many airliners

reduced the percentage of fuel hedging after the drop in oil prices, Ryanair kept

having a conservative approach to the commodity.

Table IV: Selected airliners future fuel hedging

12 The sale and lease-back will decrease on-balance sheet financial leverage, which in turn decreases the beta leveraged of the company and the cost of capital. Nevertheless, this instrument is more costly than an equivalent amount of debt and so will reduce the free cash flow available to investors. At the end, both effects shall cancel out and the value of the firm will not depend on the amount of operational leasing agreements outstanding.

Lower financing cost, more value to shareholders …

95% of the fuel consumption locked for fiscal 2017 …

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1.4

3.2

3.8

3.9

5.0

5.3

6.9

18.7

18.9

21.3

12%

17%

25%

26%

7%

5%

46%

16%

18%

25%

Morocco

Portugal

Belgium

Poland

France

Germany

Ireland

UK

Spain

Italy

Graph XIII:Ryanair top 10 countries by deparding seats

Market share Departing seats (in M)

Source: Ryanair results presentation fiscal 2015

The company uses further derivative financial instruments to hedge the exposition

to foreign currency and interest rates risks. The foreign currency risk arises

primarily with the UK pounds sterling and the US dollar. The company hedges

naturally a substantial part of the costs in UK pounds sterling by matching

revenues in UK pounds sterling. More significant are the cost arising in US dollars,

namely the jet fuel, the aircraft acquisition and maintenance and the aviation

insurance, which are hedged using forward currency contracts. The interest rate

risk arising from the debt and operational leasings in U.S. dollars is managed by

using cross-currency swap contracts that convert the floating interest rate debt in

US dollars to fixed interest rate in euros. The part of the debt that is not covered

by the aforementioned contracts is hedged by holding floating interest rate

deposits in US dollars.

Ryanair’s hedging policy reduces the volatility of earnings and increases its

predictability. Therefore, it reduces the overall risk of the firm and, hence, it

increases the value of the company to shareholders.

Ryanair’s strategy

Ryanair holds an average market share of 8.3% across Europe and it has

consolidated its position as a market leader in some of Europe’s largest markets

such as Italy and Spain, where it holds 26% and 18% market share13, respectively.

Moreover, the airliner is expected to increase its average market share in the next

nine years to 12.6%. In the short/medium-term Germany will be the main driver for

growth, where Ryanair is expected to increase its market share from 4.7% to

20%14. The airliner is also likely to enlarge its market share in Scandinavia, where

it cut back capacity to the detriment of the past expansion in Italy. In addition,

Ryanair will keep adding capacity in Greece, a favoured vacation destination for

many countries in Western Europe where it has a strong presence. In the long-

run, the main trigger of growth is expected to be Central and Eastern Europe. The

airliner is the market leader in some of these countries (i.e. Poland, Lithuania and

Slovakia), nevertheless, other opportunities to grow will surge following the

projected economic growth for the region.

13 Ryanair’s FY 2015 results presentation. Market share calculated as a percentage of the departing seats in the country. 14 The passengers carried from Germany represents around 12.5% of the intra-European aviation market (as of 2015, Eurostat). Therefore, the increase in the market share in the country will mean an increase in the overall market share of 1.9%.

Further hedges of operational

expenses and interest rates …

Lower overall risk – more value to shareholders …

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0.96 0.96 0.991.09 1.12 1.15 1.18 1.21 1.24 1.28 1.30 1.33 1.35

7.9% 8.2% 8.3% 8.3%9.4%

10.4% 10.8% 11.2% 11.4%12.1% 12.4% 12.6% 12.6%

FY2012

FY2013

FY2014

FY2015

FY2016

FY2017

FY2018

FY2019

FY2020

FY2021

FY2022

FY2023

FY2024

Graph XIV:Ryanair market share

Number of passengers intra-European aviation market (in B)* Ryanair market share

Source: Eurostat, Eurocontrol and Nova Research Tem*It does not include Turkey and Russia

24.6

22.8

12.5

11.7

8.4

2.2%

2.0%

1.1%

1.0%

0.8%

Spain

Germany

UK

Italy

France

Graph XV:Top 5 Germany country pairs

Passengers carried

Share of the intra-European market*

Source: Eurostat, as of 2014*It does not include Turkey and Russia

0

50

100

150

200

250

300

Graph XVI:Ryanair's weekly departures from Germany

Summer 2012 Summer 2013

Summer 2014 Summer 2015

Source: Flightstatus

34%

17%10%

6%

5%3%

25%

Graph XVII:Market shares in Northern Europe

SAS Norwegian

Finnair LH group

Winderoe Ryanair

Others

Source: CAPA

Germany

Germany is the second largest market for air transportation in Westwern Europe

with 112 million departing seats as of 2014, where Ryanair accounts for only

4.7%. Lufthansa is the clear market leader in the country with a market share of

31.9% (41.1% if Germanwings is taken into account), followed by Air Berlin with

12.6% of the departing seats. Germany international and domestic air

transportation market has seen negligible penetration of foreign LCCs as the

competition from the national flag carrier and national LCCs left few profit

opportunities even for efficient airliners like Ryanair and EasyJet. Nevertheless, as

a result of the restructuring process of Lufthansa group and Air Berlin, which has

meant cutting routes and traffic, there is an opportunity to return to Germany

domestic market seven years later and increase the routes and frequency of the

flights to Spain and Italy - two favoured destinations for German travellers where

Ryanair already has a strong presence. Ryanair has already started a fast

expansion and it aims to capture up to 20% of the market. The rapid growth

strategy will include primary airports such as Berlin Tegel, Düsseldorf and Munich

with connections between them and with other major European hubs. The main

airport in the country, Frankfurt Main, will not be part of the network served by

Ryanair given the slot requirements, the not feasible Ryanair’s turnaround goal of

25 minutes and the high charges at the airport.

Northern Europe

Altogether, the Nordic countries had almost 70 million departing seats in 2014,

where Norway stands out with around 26 million seats. The Nordic air scape is

clearly dominated by the flag carrier of Sweden, Norway and Denmark – SAS.

With a share of 34% of the seats departing from the Nordic countries, SAS is the

market leader in each of these countries, except in Finland were Finnair carries

Forecast

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0

50

100

150

200

250

300

Denmark Finland Sweden Norway

Graph XVIII:Ryanair's weekly departures in Northern Europe

Summer 2012 Summer 2013

Summer 2014 Summer 2015

Source: Flightstatus

4.7

9.0

9.4

9.9

45.2

0.4%

0.8%

0.8%

0.9%

4.1%

Netherlands

Germany

UK

Spain

Intra-Northern Europe

Graph XIX:Top 5 Nothern Europe country pairs

Share of the intra-European market*

Passengers Carried

Source: Eurostat, as of 2014*It does not include Turkey and Russia

0

40

80

120

160

Athens Chania Thessaloniki

Graph XXI:Weekly Departures Greece

Summer 2012 Summer 2013

Summer 2014 Summer 2015

Source: Flightstatus

2.0

2.6

5.1

5.6

6.3

0.2%

0.2%

0.5%

0.5%

0.6%

Greece

United Kingdom

Germany

Italy

France

Graph XX:Top 5 Greece country pairs

Share of the intra-European market*

Passengers Carried

Source: Eurostat, as of 2014*It does not include Turkey and Russia

almost 60% of the passengers. Finland is also characterized by a very low

penetration of LCC, since the segment represent less than 20% of the total market

when compared to a European average of around 40%. Norwegian Air Shuttle is

per excellence the LCC of Scandinavia with an overall market share of 17% and

there has been low penetration of foreign LCCs such as Ryanair and EasyJet

which hold a market share inferior to 5%.

SAS and Finnair have gone through a restructuring process recently, of which

Norwegian took advantage to increase its presence in the region. Despite this

attractive scenario, Ryanair has been taking capacity out of Scandinavia since

2012/2013, particularly in Sweden where it had built a wide network of 20 regional

and primary airports. This is a consequence of the aircraft reallocation towards

Italy - where Ryanair entered the domestic market - and Ireland - after the

abolishment of the air travel tax. Additionally, Ryanair has been reallocating the

capacity inside the region from regional airports to the main hubs in Scandinavia:

Copenhagen, Stockholm Skavsta, Gothenburg City Airport and Oslo Rygge.

It is predictable that Ryanair expands in the attractive Scandinavian market in the

medium-term as the deliveries of the new Boeing 737 start taking place, namely

by serving routes to Spain and the UK. However, the airliner might be unable to

compete in the larger Intra-Northern Europe market given the established

presence of the national carriers such as SAS, Nowergian and Finnair.

Greece

Unlike any other country in the Balkans, Ryanair has been building in the recent

past a significant presence in Greece, being the second largest airliner by seat

capacity in the country, just behind the national flag carrier Aegean Airlines.

Greece has seen one of the fastest penetrations of LCCs, mainly at the cost of the

previously stated-owned Olympic Air. The share of international seats taken

by LCCs grew from 21% in 2009 to 40% in 201415. Nevertheless, the domestic

market continues to be largely dominated by legacy carrier, namely the merged

Aegean Airlines and Olympic Air, counting with a slightly presence of Ryanair.

Ryanair has been expanding its domestic and international routes to/from Greece

and serves currently 11 airports with 3 bases. In the sequence of the global

strategy to increase the network of primary airports, in 2013 Ryanair started flying

to Greece’s busiest airport, Athens International, and it has been increasing

capacity in Athens since then. It is predictable that Ryanair leverages further its

presence in Athens to smooth the seasonality in revenues coming from the

15 CAPA - Greece aviation and tourism - Part 1: potentially major forces in supporting economic re-development

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3.1%

1.7%

2.7%

3.0%

2.5%

3.0%

2.8%

3.0%

3.5%

2.5%

2.1%

Bulgaria

Croatia

Czech Republic

Estonia

Hungary

Latvia

Lithuania

Poland

Romania

Slovakia

Slovenia

Graph XXII:Real GDP CAGR14-20

Source: Economist Intelligence Unit

8.2%

26.7% 26.2%30.2%

4.4% 5.2% 4.0% 4.9%

2004 2010 2012 2014

Graph XXIII:LCCs share of total seats

Eastern/Central Europe (To / From)

Eastern/Central Europe (Within)

Source: CAPA

country, while at the same time it increases the connections during peak season

from the UK, France, Italy and Germany to the country’s summer destinations.

Central and Eastern Europe

After the widespread economic downturn all over Europe following the financial

crisis in 2007, Central and Eastern Europe is fastest growing region in Europe.

Nevertheless, it is still characterized by a low families’ disposable income that is

predictable to increase as the economy grows. Moreover, the intra-

Central/Eastern European countries market still has a limited size and is

dominated by the national flag carriers and the largest LCC in the region, Wizz Air.

Therefore, with the economic upspring, the demand for air travelling for both intra-

region and connections to the Western will increase and significant opportunities

will arise for Ryanair due to the low penetration of LCCs and the few sizable

legacy carriers currently operating in these countries that display financial health.

Poland is the largest market for air travelling in the region with over 12 million

departing seats as of 2014. Ryanair currently serves 11 airports and is the number

one carrier in the country with a market share of 26%. Ryanair’s previous strategy

of serving only secondary airports has driven it away from Poland’s busiest airport

(and one of the busiest in the whole region), Warsaw Chopin. Although the current

strategy foresees an enlargement of the primary airports network, it should not

pass in the medium-term by Warsaw Chopin since Wizz Air has gained a

significant market share in the airport and it currently serves the major hubs in

Western Europe. Moreover, the competition from the already restructured and with

a fast-growing plan Lot Polish Airlines will limit Ryanair’s ability to conquer further

market share in the country and its strategy will pass by consolidating its position

in the connections to the Western, while looking for opportunities in the

connections to other Eastern countries.

Except in Poland, where the national air carrier LOT Airlines seems to be

financially healthy and able to invest in fleet to accommodate the projected future

demand, Ryanair and Wizz Air are in the pole position to expand their presence in

the region. Both airliners have large aircraft orders for the next years and they will

certainly not disregard the opportunities these countries display.

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4152 50

29 3117 21 20

11

825

28 25

14

41

52 50

29

39 4249

45

25

FY2016

FY2017

FY2018

FY2019

FY2020

FY2021

FY2022

FY2023

FY2024

Graph XXIV:Aircraft planned deliveries

Orders Options

Source: Ryanair Annual Report 2015

Valuation

In order to reach the value of Ryanair shares, it was initially projected an income

statement and balance sheet for every year until fiscal 2024. Nova Research

Team believes the margins and CAPEX levels will stabilize by then and, hence, a

perpetuity formula was applied to compute the present value of the cash flow

generated by the airliner from fiscal 2025 onwards.

Besides the projections of the established business in Europe, a business plan

was designed for the possibility of Ryanair operating transatlantic routes16. The

value of both European and transatlantic segments was calculated separately and

since we cannot perceive how likely the latter scenario is, its value is solely

indicative. Therefore, our price recommendation focuses only on Ryanair’s

established segment.

Income Statement

Scheduled Revenues

The scheduled revenues were computed according to the following bottom-up

approach:

Scheduled Revenues = Passengers carried * Average fare where Passengers carried = Available seats * Load factor

where Available seats = Average no. of aircrafts * Average sectors flown by aircraft * no. of passengers by aircraft

Available seats In what concerns the average number of aircrafts, Nova Research Team broke

down further the analysis into deliveries occurring during the fiscal year, disposals

of aircrafts, aircrafts grounded during the winter and wet leases. Regarding aircraft

deliveries, Ryanair ordered from Boeing 272 aircrafts: 172 Boeing 737-800 to be

delivered until fiscal 2019 and 100 Boeing 737 MAX 200 to be delivered between

fiscal 2020 and fiscal 202417. Moreover, the airliner still holds an option to buy

further 100 Boeing 737 MAX 200 until fiscal 2024.18 Secondly, as the fleet

increases Ryanair plans to dispose less efficient aircrafts. It is expected that these

disposals occur after the peak season, which matches with Ryanair’s half of the

fiscal year. In addition, Ryanair grounds every winter aircrafts because of both

weak demand and to perform longer maintenance work. Supported on historical

16 Referred hereafter also as “transatlantic segment”; “transatlantic business”; “transatlantic project” 17 As of April 1st, 2015 18 By analysing historical deliveries, Nova Research Team found that the average month of delivery was August, which was assumed to keep constant for the projection period.

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FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2024

Average no. aircrafts 311 350 372 396 415 497

Average sectors flown by aircraft 1,940 1,940 1,940 1,940 1,940 1,940

No. passengers per aircraft 189 189 189 189 189 192

Available Seats FY (in M) 114 128 137 145 152 185

Source: Nova Research Team

R Square 56%

Adjusted R Square 53%

Observations 17

Coefficients std. error P-value Lower 95% Upper 95%

Intercept 1.093 0.065 0.000% 0.954 1.231

Av. Fare without Inflation (0.006) 0.001 0.056% -0.009 -0.003

311350 372 396

415453

473 490 497

FY2016

FY2017

FY2018

FY2019

FY2020

FY2021

FY2022

FY2023

FY2024

Graph XXV:Forecasted average number of aircraft operating

during the year

Deliveries Disposals

Grounded Wet leases

Average no. Aircrafts

Source: Ryanair Annual Reports and Nova Research Team

analysis, it was assumed that the airliner will ground 40 aircrafts in fiscal 2016,

which will increase to 64 in fiscal 2024. Al last, Ryanair usually wet leases aircrafts

during the summer to accommodate demand. As the fleet will increase

significantly, it is not predictable that there will be need to use short-term leases

from fiscal 2017 onwards. Following the aforementioned approach, it is expected

an average annual growth of the fleet of 6% from fiscal 2016 until fiscal 2024.

Regarding the average number of sectors flown by each aircraft during the year,

Nova Research Team does not expect major changes relative to the past. It is

predictable that Ryanair expands its network of routes in Eastern/Central Europe

and in the Nordic region. At the same time, Ryanair will enhance its position in

domestic markets by flying more frequently and by expanding the airports served

within countries such as Germany, Spain, Italy and Greece. Overall, Nova

Research Team believes that the average annual sectors flown by each aircrafts

will keep constant throughout the analysis period at 1,940 sectors.

Finally, regarding aircraft capacity, each Boeing 737-800 can carry 189

passengers, while the Boeing 737 MAX 200 will increase the capacity to 200

passengers. The average number of seats during the year was weighted on the

number of each type of aircraft operation during that fiscal year.

The number available seats are expected to increase from 114 million in fiscal

2016 to 185 million in fiscal 2024, which represents an average annual growth of

6.3% during the period.

Table V: Available seats per fiscal year breakdown

Load factor Theoretically, the load factor is very dependent on both demand and average

fares charged. Since none of the proxies used for demand (growth in EU’s GDP

and growth in RPK in Europe) was statistically significant to explain past variations

in the load factor, the latter was computed based on the following regression:19

Load factor = α + β* Average fare + ϥ, where the average fare is adjusted for inflation

19 In the sensitivity analysis performed latter in this chapter, it was built a 95% confidence interval for Ryanair’s share value based on the lower 95% and upper 95% confidence thresholds for the average fare without inflation coefficient.

19

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4,932 5,371 6,202 7,192 7,865 8,622 9,430 10,430 11,1061,533 1,7751,853

2,0022,102

2,3752,495

2,5602,594

6,4657,146

8,0569,193

9,96610,997

11,92512,990

13,700

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

Scheduled Revenues (in M€) Ancillary Revenue (in M€)

Source: Nova Research Team

105 120 128 136 142 155 162 168 170

114128

137145 152

167 175 182 185

92.0% 93.5% 93.6% 93.4% 93.0% 92.8% 92.4% 92.2% 92.0%

9.4% 10.4% 10.8% 11.2% 11.4% 12.1% 12.4% 12.6% 12.6%0.0%

20.0%

40.0%60.0%

80.0%

100.0%

120.0%140.0%

160.0%

180.0%

200.0%

-

20

4060

80

100

120140

160

180

200

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

Graph XVI:Forcasted passengers carried by Ryanair and implict market share

No. Passengers (in M) Available Seat Miles (in M) Load Factor Market Share*

Source: Nova Research Team and Eurostat*It does not include Turkey and Russia

Nova Research Team projections are in line with Ryanair’s management team for

the short-run. Nevertheless, we took a more conservative approach for a longer

time horizon: we expect Ryanair to carry 170 million passengers by fiscal 2024,

while the management team believes the airliner will carry around 180 million

passengers by then. This corresponds to a market share in the intra-European

aviation market (excluding Russia and Turkey) of 12.6% by fiscal 2024. Currently

Ryanair holds an 8.3% market share, which means that Nova Research Team

expects a penetration of 4.3% over the course of the next nine years.

Average Fare

The average fare charged by Ryanair is very dependent on its operating cost.

Since the airliner has a “load factor active/ yield passive” strategy, the fares are

majorly set in a cost plus a margin basis rather than looking at competitors price

offering for the same routes. Therefore, Nova Research Team performed a

regression for the elasticity of the average fare charged in relation to the cost of

each available seat per mile (CASM):20

ln (average fare) = α + β1* ln (CASM) + ϥ

Ancillary Revenues

The ancillary revenue was computed by multiplying the average ancillary revenue

by the number of passengers carried during the fiscal year. Since the partnership

20 Similarly to the load factor regression, it was computed a 95% confidence interval to the average fare.

R Square 66%

Adjusted R Square 63%

Observations 17

Coefficients std. error P-value Lower 95% Upper 95%

Intercept 5.497 0.315 0.000% 4.826 6.167

ln(CASM) 0.603 0.112 0.008% 0.364 0.84320

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4,932 5,358 5,750 6,233 6,709 7,527 8,096 8,635 8,9951,533 1,778 1,920 2,069 2,198

2,4482,605

2,758 2,861

6,4657,136 7,670

8,3018,907

9,97510,701

11,393 11,856

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

Graph XXVII:Breakdown project operating revenues

Scheduled Revenues (in M€) Ancillary Revenue (in M€)

Source: Nova Research Team

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

2007 2011 2015 2019 2023

Graph XXVIII:Forecasted european brent price, jet fuel price

and USD/EUR FOREX rate

Europe Brent (US$ per Gallon)

Average Rynair's jet price (€ per Gallon)

Market exchange rate (USD/EUR)

Source: World Bank (Forecast October 2015) and Nova Research Team

with Hertz ended during fiscal 201621 and the airliner was left without a car

partnership for July and August, at the time it established a new partnership with

CarTrawler22, we expected a decrease in the average ancillary revenue for fiscal

2016 between 5% and 10%23. From fiscal 2017 onwards Nova Research Tem

expects that the average ancillary revenue will keep constant at fiscal 2016 levels

(in a real basis) due to the use of global system distribution services. Finally, the

average ancillary revenue was adjusted to take into consideration the expected

inflation rate for each fiscal year.

Fuel and Oil Expenses Fuel and oil expenses are an exceptionally important cost for any airliner and

account for almost half of Ryanair’s operating expenses. This caption was

computed with the following reasoning:

Fuel and oil expenses = av. jet fuel price * av. consumption per mile * total miles flown

Ryanair hedged 95% of the expected jet fuel consumption for fiscal 2016 and

fiscal 2017 at US$ 2.93 and US$ 1.97 per US gallon, respectively. The airliner had

also locked the exchange rate related to 95% of the expected jet fuel expenses for

the same period at 1.33 US$/€ and 1.19 US$/€, respectively. For the remaining

part of the expected consumption, Ryanair will purchase jet fuel at the market

future spot price. Since jet kerosene is not widely covered by analysts and as it

has had a correlation with the price of Europe Brent close to one, Nova Research

Team assumed that the expected variation in the price of jet kerosene would

21Recently Ryanair started using global distribution services (e.g. Amadeus and Travelport), which give travel agents direct access to all of its fares. This means that tickets can be purchased without having to go through the airline’s website, where Hertz’s serv ices were advertised. Hertz accused Ryanair of breaching the contract and ended the long-lasting relationship between the two parties. 22 CarTrawler is an Irish online platform that connects a large number of car rental companies (including Hertz) to the final customer. 23 Car rental revenues represent around 10% of the total ancillary revenue.

Forecast

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2,0401,755 1,808

2,0282,232

2,5362,763

2,9903,181

468 527 561 596 624 682 712 738 749

2.161.65 1.60 1.69 1.78 1.89 2.00 2.12 2.26

(0.50)

0.50

1.50

2.50

3.50

4.50

5.50

6.50

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

FY2016

FY2017

FY2018

FY2019

FY2020

FY2021

FY2022

FY2023

FY2024

Graph XXIX:Forecasted fuel and oil expenses and its KPIs

Fuel and Oil Expenses (in M€)

Total Miles Flown (in M)

Average fuel price (€ per US Gallons)

Source: Nova Research Team

correspond to the expected variation in the price of Europe Brent24. In addition, the

exchange rate at which the jet fuel will be bought was assumed to be the 1.11

US$/€ for fiscal 2016 and 1.06 US$/€ for fiscal 201725. Ultimately, from 2018

onwards the average price of jet fuel is based solely in World Bank expectations

for the Europe Brent price converted to euros at the future spot USD-EUR

exchange rate.

Although Ryanair has been decreasing the average consumption per aircraft in

last three years, as the airliner will expand the network of primary airport that have

traffic congestions and longer turnarounds, Nova Research Team assumed that

the consumption will keep constant at 2015 levels, which was 2.01 US gallons per

mile flown. From fiscal 2020 onwards, the fuel consumption is expected to

decrease as the delivery of the new Boeing 737 MAX 200 start taking place. This

aircraft is expected to be up to 18% more fuel efficient, which will translate in a

reduction on the average consumption per mile to 1.88 US gallons by fiscal 2024.

For the total miles flown, it was multiplied the number of available seats during the

fiscal year by the average length of passenger haul. The latter is predicted to

remain at 776 miles since Ryanair will compensate longer hauls with more

domestic flights.

The fuel and oil expenses will increase significantly during the period due to

Ryanair’s expansion of the fleet. Nevertheless, the airliner is expected to benefit

from low oil prices, such that the weight of this caption will reduce from an

historical average26 of 35% to around 26% during the forecasted period.

EBITDAR In FY 2018 Ryanair shall reach a remarkable EBITDAR margin of 36.1%

supported on the full benefit of low oil prices27. The margin will drop afterwards,

mainly due the expected increase in the airport and handling charges. All the other

captions are expected to maintain a roughly constant weight relative to operating

revenues. During the forecast period it is expected an average EBITDAR margin

of 32.5%, which is 880 basis points above the historical average (i.e. from fiscal

2008 to 2015). This improvement on the EBITDAR margin results mainly from the

steep reduction of the weight of oil and fuel expenses during the forecast period.

24 Based on the forecast of World Bank in October 2015. 25 1.11 US$/€ corresponds to the average between the exchange rate from March 2015 until December 2015 and the Euro futures price

in CME for March 2016; 1.06 US$/€ corresponds to the average of the euro futures price trading in CME for the period correspondent to fiscal 2017; from fiscal 2018 onwards the exchange rate was computed based on the relative purchasing power parity. 26 This average was computed from fiscal 2008 until fiscal 2015. 27 Ryanair has hedged the future fuel consumption at a higher price than current expected future price for the commodity. Therefore, just from fiscal 2018 the airliner will fully benefit from the low oil prices.

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1,9852,561 2,766 2,867 2,968 3,216 3,335 3,417 3,387

30.7%35.9% 36.1% 34.5% 33.3% 32.2% 31.2% 30.0% 28.6%

-40.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

-

1,000

2,000

3,000

4,000

5,000

6,000

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

Graph XXX:Forecasted EBITDAR and EBITDAR margin

EBITDAR (in M€) EBITDAR Margin (%)

Source: Nova Research Team

Balance Sheet

Property, Plant and Equipment

Ryanair will increase the fleet by more than 200 aircrafts in the next nine years

with the acquisition of 172 Boeing 737-800 aircrafts until fiscal 2019 and 200

Boeing 737 MAX 200 aircrafts between fiscal 2020 and fiscal 202428. Nova

Research Team observed an implicit discount on CAPEX for fiscal 2015 of around

40%, which was considered to hold for all aircrafts acquired under the Boeing

contract of 2013 (i.e. relative to the acquisition of the Boeing 737-800 until fiscal

2019). Regarding the Boeing 737 MAX 200, Ryanair’s CEO stated that these

aircrafts will be acquired under less favourable commercial terms, but still at a

discount from the list price. From the analysis of historical debt, Nova Research

team found implicit discounts on aircraft acquisitions ranging from 10% to 40%.

Therefore, for the deliveries taking place after fiscal 2019, it was considered a

discount of 10% relative to the listed price of 104 M€29. In addition, the price of the

aircrafts will increase annually by the inflation rate in the US.

The other items of the PPE caption (i.e. Hangars and buildings, Fixtures and

fittings, Motor vehicles, etc.) will also increase to accommodate the expansion of

the fleet. Nonetheless, the impact of these items in the overall level of CAPEX are

still insignificant. The CAPEX will escalate with the delivery of the new Boeing 737

MAX 200, which is expected to cost around 17 B€ spread over five years.

28 The airliner will dispose 99 aircrafts and 61 operational leasing contracts will end during the period. 29 List price as of 2014.

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1,2531,552

1,889

910

3,2533,964

4,731

3,647

1,312

33 40 44

1835 42 49

3713 -

1,000

2,000

3,000

4,000

5,000

525456585

105125145165

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

Graph XXXI:Forecasted aicraft delivery and CAPEX

CAPEX (in M€) Aircrafts acquired during the year

Source: Nova Research Team

4,032 4,6625,959 6,147

8,461

11,184

14,47616,236 15,318

77 116214 187 255

466626

759 780

(100)1003005007009001,1001,3001,500

-2,0004,0006,0008,000

10,00012,00014,00016,00018,000

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

Graph XXXII:Forecast debt and interest expense

Current Maturities of Debt Non-Current Maturities of Debt

Interest Expense

Values in M€Source: Nova Research Team

Debt

Ryanair has financed most of its aircrafts acquisitions through the Ex-Im US Bank

guaranteed loans. Except in fiscal 2016 and 2017 where all/some aircraft will be

acquired with the proceeds from the issuance of the Eurobonds, it is predictable

that Ryanair finances the aircrafts with debt, mainly through aforementioned

instrument. These debt facilities have generally had 12 years to maturity with

annual amortizations of the initial capital. It was assumed that they are

remunerated at the 6M-EURIBOR plus a spread of 1.83%. The interest rate is

expected to increase throughout the period (FY 2016: 1.3% to FY2024: 4.9%) as

inflation reaches its long-term equilibrium of 2% and as the real EURIBOR interest

rate converges to the pre-crisis level of around 1%.

Working Capital

Although there are relevant variations on the working capital during the year, the

year end is a good proxy for the average working capital during the year. In

addition, it was considered that Ryanair would keep the same cash conversion

cycle as in fiscal 2015.

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(2,091) (2,275) (2,448) (2,661) (2,872)(3,232)

(3,487)(3,732) (3,901)

351 374 401 437 473 532 575 616 647

(2,442) (2,649) (2,849)(3,098)

(3,345)(3,764)

(4,062) (4,348) (4,549)

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

Graph XXXIII:Forecasted working capital

Inventories Prepayments

Trade receivables Operational Cash

Trade Payables Accrued Expenses and Other Liabilities

Working Capital

Values in M€Source: Nova Research Team

6%

11%

15%

19%17% 17%

13%11%

9%8%

FY2016

FY2017

FY2018

FY2019

FY2020

FY2021

FY2022

FY2023

FY2024

Graph XXXIV:Ryanair's ROIC and WACC evolution

WACC ROIC

Source: Nova Research Team

The Accrued Expenses and Other Liabilities, which includes unearned revenue, is

the main component in the working capital. This caption is expect to increase

significantly during the period as Ryanair carries more passengers and, hence,

benefits from a higher amount of forward bookings. As a result, Ryanair will benefit

from constant disinvestments in working capital throughout the period, which can

cover around 20% of the anticipated capital expenditures.

Unlevered Free Cash Flow (UFCF)

The CAPEX is the main caption in the free cash flow generated by the firm.

Despite the disinvestment in net working capital during the period, the cost of

expanding the fleet will decrease the annual cash available to all investors relative

to what the firm generates from operations. In particular, from fiscal 2020 to fiscal

2023 Ryanair is expected to display a negative UFCF due to the acquisition of 163

aircrafts at total cost estimated to be around 17 B€. Despite the negative UFCF,

this investment in CAPEX creates value to shareholders since the ROIC continues

to be higher than the airliner’s cost of capital during the period.

As a signifcant part of the investment in fleet will be made to replace existing less

efficient aircrafts30, mainly after fiscal 2020, the annual growth in seat capacity will

start to slow down and, so will operating revenues. Consequently, the ROIC will

decrease towards the WACC from fiscal 2020 ownwards. In perpetuity, Nova

Research Team expects the ROIC to be equal Ryanair’s cost of capital, since the

airliner is not likely to hold its cost advantage indefinitely. Wizz Air already

replicated its bussiness model and other large European aviation groups are likely

to explore the ultra-low cost segment through its subsidiaries. In addition, it was

30 Of the 311 aircrafts acquired during the period, 99 will replace existing aircrafts. After fiscal 2020 will occur ¾ of the planned disposals.

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Comparables βu

Ryanair 0.56

Tier I - European LCC

easyJet 0.44

Air Berlin 1.10

Norwegian Air Shuttle 0.54

Tier II - International LCC

Southwest Airlines (US) 1.11

Jetblue (US) 1.01

WestJet (Canada) 0.46

Cebu Airliners (Philippines) 0.36

Allegiant Travels (US) 0.94

Tier II - European legacy carriers

IAG 1.03

Lufthansa Group 0.85

Air France_KLM 0.85

SAS 0.50

Flybe Group 0.56

Average 0.74

Unlevered Cost of Capital

Rf 1.35%

Bu 0.74

MRP 6.25%

Ru 5.95%

Cost of Debt

Rf 1.35%

Rating BBB+

Credit Default Spread 1.60%

Rd 2.95%

Unl. cost of capital, cost of debt and

WACC

Table VI:

668 839 677

1,786

(460) (790)(1,537)

(382)

1,848

(6,000)

(4,500)

(3,000)

(1,500)

-

1,500

3,000

FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

Graph XXXV: Forecasted Unlvered Free Cash Flown breakdwon

EBIT Cash Operational Taxes

Δ NWC CAPEX

Unlevered FCF

Values in M€Source: Nova Research Team

considered that the historial median payout ratio of 75% will hold in perpetuity.

Therefore, the UFCF is expected to grow from fiscal 2024 ownwards at 1.5%.

Discount rate

Ryanair displays an unlevered cost of capital lower than the average of the

selected comparable companies (refer to Table VI), mainly due to the low

operational leverage. Nevertheless, the financial theory supports that in the long-

run the operational risk of an individual airliner will tend to the average of the

market. Therefore, the unlevered cost of capital was calculated based on the

market unlevered beta of 0.7431. In addition, it was considered a risk free of

1.35%, which corresponds to the yield to maturity of the 30-Y German Bunds and

a market risk premium of 6.25%32. Therefore, by applying the CAPM formula,

Nova Research Team reached an unlevered cost of capital for Ryanair of 5.95%.

In what concerns the cost of debt, although Ryanair has unsecured bonds

currently trading with a BBB+ credit rating, Nova Research Team did not use the

yield to maturity of these bonds as a proxy for the cost of debt for two reasons:

these bonds are infrequently traded and they bear default risk. Based on

Damodaran research, a BBB+ bond has on average an implicit default spread of

1.60%. Therefore, given the risk-free for Europe of 1.35%, Ryanair’s cost of debt

was considered to be 2.95%.

Al last, as it happens with the operational risk of a company, the financial theory

says that the level of financial leverage of a company tends to the market average

31 The unlevered beta for the airliners was computed based on the Bloomberg’s levered beta for two years of weekly data. Besides the capital structure, the latter beta was adjusted for the risk of debt. Based on the credit rating of each airliner it was attributed a default spread (i.e. from Damodaran). Then, we reach the cost of debt by adding the risk free for the country of each company. At last, using the CAPM formula it was computed the implicit beta of debt. The unlevered calculated according to the following formula: βu = [βe + βd * D/E * (1-t)] / [1+ D/E * (1-t)]. In this calculation it was assumed that a constant level of debt for the airliners. 32 Based on a publication of KPMG Netherlands “Equity Market Risk Premium – Research Summary”, October 2015

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WACC Terminal Value

Net Debt/Equity 24.36%

Ru 5.95%

Rd 2.95%

Re 6.68%

t 12.50%

D/EV 19.59%

WACC 5.88%

Source: Bloomberg; Damodaran, KPMG

2,179

31,058 30,896 31,20828,879

(163)

312

-5,000

10,00015,00020,00025,00030,00035,00040,00045,00050,000

Graph XXXVI:Equity value breakdown

Source: Nova Research Team

in the long-run. In this particular case, the D/E to equity ratio of Ryanair shall tend

to 24.36% in perpetuity. Therefore, we will reach a long-term cost of equity for

Ryanair of 6.68% and a long-term WACC of 5.88%, which will be used to discount

the cash flow generated by the airliner after fiscal 2024.

Enterprise Value, Equity Value and Value per Share

Nova Research Team believes Ryanair will continue to rely heavily on debt

instruments to finance the aircraft acquisitions. As most of the aircrafts are

acquired under a SPV, which was a scheduled debt repayment, the tax shields

shall exhibit the same risk profile as the debt itself. Therefore, the tax shields were

discounted at the cost of debt of 2.95%, while the unlevered free cash flows were

discounted at the unlevered cost of capital of 5.95%. Following this approach, a

value of operations for the explicit period of 2.2 B€ was reached.

Nevertheless, Nova Research Team considers that Ryanair will adjust its debt

relative to the value of the company towards the market average as it stabilizes

the fleet growth. Therefore, the cash flows in perpetuity were discounted at the

long-term WACC of 5.88%. In addition, it was considered that the CAPEX after

fiscal 2024 will be essentially to replace operational assets and that the revenues

and the free cash flow will grow annually by 1.5%. Following this reasoning,

Ryanair operations are worth 31.6 B€. Adjusting this value for non-operational net

assets (i.e. intangible assets, net derivative financial instruments, non-operational

deferred taxes and provisions33) and for the net debt, we reached an equity value

as for the beginning of fiscal 2017 of 31.7 B€ and a value per share of €23.7234.

33 All at market values. 34 The value per share was computed by dividing the equity value by the diluted number of shares.

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FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2021 FY 2022 FY 2023 FY 2024

D/EV -0.8% -1.0% 0.5% 2.7% 1.7% 7.0% 12.6% 18.8% 21.9%

P/E 22.3x 25.6x 19.5x 19.4x 18.8x 20.0x 21.6x 25.1x 29.4x

EV/EBITDAR 19.7x 15.6x 12.4x 11.9x 11.6x 12.0x 11.9x 12.7x 13.2x

EV/EBITDA 21.3x 16.5x 13.0x 12.4x 12.0x 12.5x 12.4x 13.1x 13.7x

Source: Nova Research Team

Table VII:

Selected financial ratios

Sensitivity analysis

The oil price is the hardest to predict input in the model. Nonetheless, Ryanair

share price is not as dependent as one would expect on the oil price since the

average airfares tend adjust to reflect the price of the input. Performing a

sensitivity analysis with changes in the price of oil of between -20% and 20%, we

found that the value of Ryanair shares predicted by our model vary between

€18.01 and €28.55. The same exercise was performed to the Airport and Handling

Charges and Route Charges captions and similar results were obtained. Nova

Research Team still analysed the impact on the value of the shares if there were

no discounts in the acquisition of the aircrafts from Boeing and concluded that the

share value is not very dependent on these discounts. Regarding the terminal

value, the value of Ryanair shares range between €19.37 and €29.61 when we

change the WACC and growth rate by 1%. It was still computed a 95% confidence

interval for the value per share in respect to the load factor coefficient and the

average fare elasticity. For the former we have an interval of €0.32, while for the

latter the interval increases to €4.64. At last, it was computed a 95% interval for

the unlevered beta of the industry. Since the standard error of the regression of

each comparable company return on the MSCI World Index return was large, the

value per share changes significantly with this input.

14.29

20.98

23.56

19.37

18.31

21.36

19.51

18.01

42.97

25.62

23.87

29.61

23.72

25.32

27.11

28.55

Beta of the industry

Average fare elasticity

Load factor coefficient

Terminal value

Aircraft price discounts

Route Charges

Airport and Handling…

Oil price

Graph XXXVII:Sensitivity analysis to selected parameters

Source: Nova Research Team

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420.6462.7

840.2

2007 2014 2034 F

Source: Boeing Market Outlook

Graph XXXVIII:Europe - North America (RPK in s USD)

2,287 2,3332,464

2,5982,734

228233

237242

247

FY 2021 FY 2022 FY 2023 FY 2024 FY 2025

Graph XXXIX:Forecasted price per aircraft and CAPEX

CAPEX Price

Values in M€Source: Nova Research Team

2,282

4,419

6,409

8,248

9,935

128

255

370

476

573

FY 2021 FY 2022 FY 2023 FY 2024 FY 2025

Graph XL:Forecasted debt and interest expense

Current Debt

Non-current Debt

Interest Expense

Values in M€Source: Nova Research Team

Valuing an opportunity: transatlantic routes

The reinvention of the low-cost model to the long-haul segment is not a recent

concept. Back in 1977, Laker Airways launched the first transatlantic flight from

London Gatwick to New York at a clear discount to the legacy carriers, but soon

went bankrupt as a consequence of the 80s crisis. Already in the 21th century,

other LCCs such as Air Berlin, WestJet, WOW Air and Norwegian Air Shuttle

started operating transatlantic routes at fares as low as 200 euros for a round-trip.

The race for launching massive low-cost operations in transatlantic routes has

started as FSC such as Lufthansa and Air France-KLM announced their plans to

launch a transatlantic low-cost subsidiary. Ryanair has already announced its

intention to create a long-haul subsidiary in 2007, but the airliner left this plan

aside for a while following the financial crisis in 2008. Now that the world economy

starts resurging, Ryanair seeks to enter this very attractive market again.

Nevertheless, the backlog of orders of both Boeing and Airbus on their newly

created long-haul aircrafts (Boeing 787 Dreamliner, Airbus A330 and Airbus A350)

and the non-favourable current commercial conditions to make the flights viable

make it unpredictable for Ryanair to launch transatlantic operations in the next

couple of years.

According to the analysis of the aircrafts currently available to fly long-haul, Nova

Research Team concluded that the aircraft that best suits the low-cost business

model for transatlantic is the Boeing 787-800. This aircraft has a capacity up to

around 300 seats, which minimizes the load factor risk when compared with other

aircrafts flying long distances such as the Boeing 747-800, the Boeing 777-300,

the Airbus A350 or the Airbus A380, and it is one of the most fuel efficient aircrafts

operating nowadays. The Boeing 737-800 sells for 224.6 M$ (as of 2015) and the

price shall increase every year by the US inflation rate.

Analysts think Ryanair will need around 50 aircrafts to fulfil the demand between

Europe and North America. Nova Research Team considered that Boeing will

deliver annually at least 10 aircrafts to Ryanair, given the low backlog of the

aircraft maker by 2020. In addition, the airliner will need to invest in hangars,

fixtures and fittings and in plant and equipment to support the transatlantic

operations. Nonetheless, there will be some synergies in CAPEX with the current

business, namely in what concerns the European offices.

Ryanair is expected to rely heavily on debt instruments to finance these

acquisitions, as it has happened in the core market. Furthermore, it was assumed

that the airliner would be offered similar debt cost and maturities as in the

European business.

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Airports served:

London Stansted

Dublin Airport

Berlin Schonefeld

Rome Ciampino

Milan Bergamo

Madrid Barajas

Paris Beauvais

Airports served:

La Guardia, NY

Chicago-O’Hare International, IL

Logan International, MA

Miami International, FL

Washington Dulles International

Seattle – Tacoma International, WA

FY 2021

Airports served:

London Stansted

Dublin Airport

Berlin Schonefeld

Rome Ciampino

Milan Bergamo

Madrid Barajas

Paris Beauvais

Brussels Charleroi

Barcelona El-Prate

Manchester Airport

Köln Bonn Airport

Glasgow or Edinburg

City Airport Bremen

Lisbon Airport

Airports served:

La Guardia, NY

Chicago-O’Hare International, IL

Logan International, MA

Miami International, FL

Washington Dulles International

Seattle – Tacoma International, WA

William P. Hobby, TX

Phoenix Sky Harbor International, AZ

Orlando International, FL

Metropolitan Oakland International, CA

Los Angeles International, CA

San Diego Intl-Lindbergh Field, CA

FY 2025

Note: The European airports without arrows serve all the US airports marked

392

840

1,328

1,911

2,506

2.0

3.9

5.9

7.8

9.8

FY 2021 FY 2022 FY 2023 FY 2024 FY 2025

Graph XLI:Forecasted passengers and operating revenues

Scheduled Revenues (in M€)

Ancillary Revenues (in M€)

Number of Passengers (in M)

Source: Nova Research Team

Analysts believe that when Ryanair transatlantic segment matures it will connect

around 14 European cities to 12 American cities. Nova Research Team

considered Ryanair will serve the following cities:

The transatlantic routes are characterized by constant demand throughout the

year that enables the airliners to display higher load factors, unlike in intra-Europe

where there is a peak during summer and a deep down during winter and, hence,

load factors range significantly along the year. From the analysis of Lufthansa, Air

France-KLM and IAG, we concluded that transatlantic routes yield on average 7%

more load factor than the European routes. Nova Research Team took a

conservative approach and assumed the load factor for Ryanair would be around

92% (i.e. relative to 91% in Europe for fiscal 2015).

Regarding the revenues, from the analysis of the only public traded low-cost in the

world operating just long-haul routes, Air Asia X, we concluded that Ryanair will

charge around 4.21 euro cents for each mile, meaning that, for example, the

average one-way fare from London to New York would be around €145. The

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KPIs FY 2021 FY 2022 FY 2023 FY 2024 FY 2025

Average consumption per mile (in U.S. Gallon) 2.55 2.55 2.55 2.55 2.55

Average Fuel Price per U.S. Gallon (€) 2.40 2.56 2.97 3.29 3.35

Average Airport and Handling Charge 2,476 2,525 2,576 2,627 2,680

Average Route Charge 1.24 1.26 1.29 1.31 1.34

Staff per aircraft 48 48 48 48 48

Sales, operations, management and administration - - - - -

Average Annual Cost of Each Employee 72,254 73,699 75,173 76,677 78,210

Marketing, Distribution and Other (% Revenues) 5.2% 5.2% 5.2% 5.2% 5.2%

Maintenance, Materials and Repairs per aircraft 15.35 31.31 47.90 65.14 83.06

Source: Nova Research Team

Table VIII:

Operating expenses KPIs

168 377677

1,0511,403

73

115

164

219

172

260

351

443

376

804

1,333

1,954

2,562

FY 2021 FY 2022 FY 2023 FY 2024 FY 2025

Graph XLII:Operating expnses breakdown

Fuel and Oil Expenses Airport and Handling Charges

Route Charges Staff Costs

Marketing, Distribution and Other Maintenance, Materials and Repairs

Depreciation

Values in M€Source: Nova Research Team

ancillary revenue shall represent 20% of the total revenues, significantly lower

than in the European business where it accounts for 25% of the revenues.

Regarding operational costs, fuel expenses would weigh more on the cost

structure than in the European business. Nevertheless, the fuel expense per mile

flown is expected to decrease significantly. In what concerns airport and route

charges, Ryanair would benefit from lower average charges in the US. The staff

cost would rise significantly both because Ryanair would have extra-expenses

such as crew stays and due to the higher number of staff required to operate the

Boeing 787-800 aircraft. However, some synergies with the current business are

expectable, namely in the incremental number of sales, administration, operations

and administration employees. As the airliner does not have the same brand

awareness in the US as it currently has in Europe, the transatlantic project would

require a higher portion of the revenues to be canalized to marketing. Finally, the

cost with maintenance, materials and repairs would increase due to the more

expensive components of the Boeing 787-800 relative to the Boeing 737-800.

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109207

321442

567

(131)(281)

(452)

(657)(862)

(22) (73) (131)(215)

(295)

FY 2021 FY 2022 FY 2023 FY 2024 FY 2025

Graph XLIII:Forecasted Working Capital

Inventories Prepayments Trade receivables

Operational Cash Trade Payables Accrued Expenses

Working capital

Values in M€Source: Nova Research Team

(2,165) (2,095) (2,160) (2,213) (2,272)

(3,000)

(2,500)

(2,000)

(1,500)

(1,000)

(500)

-

500

FY 2021 FY 2022 FY 2023 FY 2024 FY 2025

Graph XLIV:Forecasted Unlevered Free Cash Flow

EBIT Notional Taxes

Δ NWC CAPEXUnlevered Operating CF

Values in M€Source: Nova Research Team

Regarding the net working capital, it was considered that the transatlantic project

would have the same cash conversion cycle as in the European market. Although

one would expect the days in advance sales to increase comparatively to

Ryanair’s current segment, since the airliner already displays 93 days in advance

sales we consider a cautious approach to keep it.

Unlevered Free Cash Flow

Similarly to the business segment in Europe, the main caption of the free cash

flow generated by the project is the CAPEX. Due to the large investment in fleet

necessary to operate the transatlantic routes, Ryanair will need funds to finance

the operations in the first years of the project. From fiscal 2026 onwards the free

cash flow to the firm is expected to turn positive as Ryanair decreases the level of

investment. In line with the expectations of Boeing35, Nova Research Team

forecasted the unlevered free cash flow to grow at a rate of 3% until perpetuity.

35 Boeing Market Outlook projects the Europe-North America segment to grow 3% from 2015 until 2034

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Comparables βu

Air Asia X LCC with just long-haul segment (Malaysia)0.81

Norwegian Air Shuttle LCC subsidiary in transatlantic routes 0.32

WestJet Low cost with transatlantic routes (Based in Canada)0.62

Cebu Airliners LCC with long-haul segment (Philipines) 0.67

Average 0.60

Source: Bloomberg

Unlevered Cost of Capital

Rf 1.35%

Bu 0.60

MRP 6.25%

Ru 5.12%

WACC Terminal Value

Net Debt/Equity 86.47%

Ru 5.12%

Rd 2.95%

Re 7.00%

t 12.50%

D/EV 46.37%

WACC 4.95%

Source: Bloomberg,

Damodaran and KPMG

Discount rate and values of operations

The long-haul segment is less cyclical than the short-haul segment. Therefore, as

one would expect, the implied risk of an airliner flying long distances relative to

airliners that focus just in the short-haul is significantly lower. Through the analysis

of comparable LCC operating in the long-haul segment, Nova Research Team

reached an unlevered beta for the project of 0.60.

Table IX: Comparable companies and unlevered beta

Based on the same risk free rate and market risk premium presented in Ryanair’s

valuation, we reached an unlevered cost of capital of 5.12%. Regarding the cost of

debt, it was assumed that the long-haul segment subsidiary would have the same

debt contractual conditions. In addition, it was assumed that the launch of

transatlantic operations would not affect the credit rating of the whole company.

As the long-haul segment is less cyclical, the airliners are on average more

leveraged. Nova Research Team believes that after fiscal 2025 Ryanair’s long-

haul segment will tend to the average debt-to-enterprise value of 46.4%.

Consequently, the cash flows from fiscal 2025 onwards were discounted at the

WACC of 4.95%.

Nova Research Team reach a net present value for Ryanair transatlantic project of

6.9 B€, which corresponds to 5.19€ for each Ryanair current shareholder.

Therefore, despite the unfavourable commercial conditions to acquire long-haul

aircrafts, the current outlook for the oil price makes it is worth to launch an ultra-

low cost airliner to operate transatlantic routes.

Table X:

Cost of capital

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Ryanair Holdings PLC

Income Statement (in € M) FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020 FY 2024

Scheduled Revenues 4,260.3 4,932.1 5,358.0 5,750.3 6,232.5 6,709.1 8,995.1

Ancillary Revenues 1,393.7 1,533.2 1,777.8 1,919.7 2,068.6 2,197.6 2,860.8

Total Operating Revenue 5,654.0 6,465.3 7,135.8 7,670.0 8,301.2 8,906.6 11,855.8

Fuel and Oil Expenses (1,992.1) (2,040.3) (1,755.2) (1,808.5) (2,027.5) (2,231.8) (3,181.4)

Ex-Fuel Operating Expenses (2,131.9) (2,439.8) (2,819.7) (3,095.6) (3,406.5) (3,706.8) (5,287.7)

EBITDAR 1,530.0 1,985.1 2,560.9 2,766.0 2,867.1 2,968.1 3,386.8

Rents and Depreciation (487.1) (534.2) (590.1) (663.2) (699.9) (825.4) (1,351.4)

EBIT 1,042.9 1,450.9 1,970.8 2,102.8 2,167.2 2,142.6 2,035.3

Financial Result (60.5) (55.1) (115.8) (213.6) (186.9) (254.5) (779.6)

EBT 982.4 1,395.8 1,855.0 1,889.2 1,980.4 1,888.1 1,255.7

Taxes (115.7) (174.5) (231.9) (236.1) (247.5) (236.0) (157.0)

Profit for the Year 866.7 1,221.3 1,623.1 1,653.0 1,732.8 1,652.1 1,098.7

Forecast

KPIs

Load Factor 88.00% 92.00% 93.53% 93.63% 93.42% 93.00% 92.02%

Average Booked Passenger Fare 47.05 47.05 44.60 44.97 45.97 47.39 52.76

Average Ancillary Revenue 15.39 14.63 14.80 15.01 15.26 15.52 16.78

Average Lenght of Passenger Haul (Miles) 776 776 776 776 776 776 776

Sectors Flow 544,466 602,912 679,510 722,503 767,870 804,274 965,266

Average consumption per mile 2.01 2.01 2.01 2.01 2.01 2.00 1.88

Average Fuel Price per U.S. Gallon (€) 2.34 2.16 1.65 1.60 1.69 1.78 2.26

Average Airport and Handling Charge 1,309.2 1,375.0 1,461.0 1,556.3 1,660.6 1,774.1 2,330.8

Average Route Charge per Mile 1.30 1.30 1.31 1.33 1.35 1.38 1.49

Staff per aircraft 31 31 31 31 31 31 31

Average Annual Cost of Each Employee 52,410 53,458 54,094 54,878 55,768 56,743 61,331

Marketing, Distribution and Other (% Revenues) 4.1% 4.4% 4.4% 4.4% 4.4% 4.4% 4.4%

Maintenance, Materials and Repairs per aircraft 0.48 0.48 0.49 0.50 0.51 0.52 0.57

Annual Rent per Aircraft Leased 2.08 2.09 2.12 2.17 2.22 2.27 2.47

Financials and valuation KPIs Income Statement

Balance Sheet

Ryanair Holdings PLC

Historical

Balance Sheet (in € M) FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020FY 2021 FY 2024

Property, Plant and Equipment 5,471.1 6,299.2 7,368.6 8,704.6 9,027.7 11,573.4 20,976.4

Intangible Assets 46.8 46.8 46.8 46.8 46.8 46.8 46.8

Working Capital (1,824.7) (2,095.1) (2,279.3) (2,451.9) (2,664.9) (2,876.0) (3,905.3)

Net Deferred Tax Assets (462.3) (418.5) (418.5) (418.5) (418.5) (418.5) (418.5)

Net Derivative Financial Instruments 413.8 10.3 10.3 10.3 10.3 10.3 10.3

Net Other non-Operating Assets 134.3 (206.9) (206.9) (206.9) (206.9) (206.9) (206.9)

Shareholder's Equity 4,035.3 3,953.1 4,364.5 4,783.6 5,222.8 5,641.6 6,963.0

Net Debt (256.1) (317.2) 156.5 900.8 571.7 2,487.5 9,539.8

Forecast

KPIs

Payout Ratio 72.59% 74.68% 74.68% 74.68% 74.68% 74.68% 74.68%

PPE and Debt

Price of each aircraft 39 38 38 43 50 92 100

Aircrafts Delivered (including options) 11 41 52 50 29 39 25

Sale and Lease Back 0 8 12 6 11 4 12

Lease Returns 0 -8 -12 -6 -11 -4 -12

Disposals 0 -1 -12 -10 0 -4 -2

Aircrafts at the end of FY 308 340 368 402 420 451 520

No. of aircraft with debt Remaining 234 211 212 231 219 218 195

Financed with Ryanair's own resources 11 44 56 56 56 56 56

Aircrafts Under Op. Leasing 51 51 51 51 51 51 51

No Outstanding Debt Remaining 12 34 49 64 94 126 218

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KPIs

Working Capital

Inventory Turnover 5.68 5.68 5.68 5.68 5.68 5.68 5.68

Prepayments/Operating costs ex-depreciation 0.03 0.03 0.03 0.03 0.03 0.03 0.03

Days on Sales Outstanding 5.15 5.15 5.15 5.15 5.15 5.15 5.15

Days on Payable Outstanding 16.94 16.94 16.94 16.94 16.94 16.94 16.94

Unearned Revenues/Scheduled Revenues 0.26 0.26 0.26 0.26 0.26 0.26 0.26

Cash Flow Statement

Ryanair Holdings PLC

Historical

CF Statement (in € M) FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 FY 2020FY 2021 FY 2024

EBIT 1,042.9 1,450.9 1,970.8 2,102.8 2,167.2 2,142.6 2,035.3

- Cash Operational Taxes (104.7) (225.2) (246.3) (262.9) (270.9) (267.8) (254.4)

'- Notional Taxes (130.4) (181.4) (246.3) (262.9) (270.9) (267.8) (254.4)

'+ ∆ Net Deffered Tax Liabilities 25.7 (43.8) - - - - -

'+Tax Adjustments 6.9 - - - - - -

NOPLAT 945.1 1,225.7 1,724.4 1,840.0 1,896.3 1,874.8 1,780.9

+Depreciation 377.7 424.7 482.2 552.6 586.6 707.0 1,209.4

Gross CF 1,322.8 1,650.5 2,206.6 2,392.6 2,482.9 2,581.8 2,990.3

- Δ NWC 397.3 270.4 184.2 172.6 213.0 211.1 169.6

- CAPEX (788.5) (1,252.8) (1,551.6) (1,888.6) (909.7) (3,252.7) (1,312.3)

Unlevered Operating CF 931.6 668.0 839.2 676.6 1,786.2 (459.8) 1,847.6

- Δ Intangible Assets - - - - - - -

+ CF Excess Cash (1,528.4) 338.5 (156.6) (552.8) (516.3) (398.5) 572.1

+ CF Available for Sale Assets 0.0 371.0 - - - - -

+ CF Derivative Financial Instruments (75.0) 403.5 - - - - -

+ CF Net Pension Funds Liabilities 0.4 - - - - - -

+ Non-operating CF from Operating Leasing 9.4 (29.8) - - - - -

+ Δ Deffered Taxes on NOLCF - - - - - - -

+ Foreign Exchange Gain/Loss (4.2) - - - - - -

+ Gains on Disposal of PPE - 22.0 - - - - -

FCF to the firm (665.7) 1,770.5 682.6 123.9 1,269.9 (858.3) 2,419.6

- Interest Expense (74.3) (77.1) (115.8) (213.6) (186.9) (254.5) (779.6)

+ Interest Tax Shield 9.3 9.6 14.5 26.7 23.4 31.8 97.5

+Δ Debt 1,347.9 (399.6) 630.3 1,297.1 187.2 2,314.3 (917.4)

+Δ Cash Shareholders' Equity (617.3) (1,303.6) (1,211.6) (1,234.0) (1,293.6) (1,233.3) (820.1)

FCF from Financing 665.6 (1,770.6) (682.6) (123.9) (1,269.9) 858.3 (2,419.6)

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Disclosures and Disclaimer

Research Recommendations

Buy Expected total return (including dividends) of more than 15% over a 12-month period.

Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.

Sell Expected negative total return (including dividends) over a 12-month period.

This report was prepared by António Caleia, a student of the NOVA School of Business and Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. This report was supervised by professor Rosário André (registered with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation methodology and the financial model. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.