Jet2 is a Public Limited Company (PLC) which is a British Airline based company located in Leeds, England. Jet2 PLC is a leading company because of low fares charges to its loyal customers, and being recognized as a winning award company in United Kingdom (UK). Jet2 provides several facilities including 70 sun, city and ski destinations across the Europe places.
Jet2 PLC has gotten a good history from so many years, and the company moves towards the positive direction for attaining its target and goal. However, pandemic situation of COVID19 changes the sentiment of the business especially for aviation business. Gross profit (GP) rate was positive from 2011 to 2020 as per the financial year data but from 2021 to 2022, GP margin rate was negative and it is witnessed (25.6) % in 2021 and 0.8% in 2022. Net income margin was quite at satisfactory level but again adverse GP rate has reduced the net income margin and it is shown as (25.6) % for both of the years, i.e., 2020 and 2021 respectively. Table #01 depicts the idea of profitability ratios of Jet 2 PLC.
Table # 01: Profitability Ratios
Jet2 suffers business losses as the pandemic situation occurs and it curtails every industry in the world. The business of Jet2 sustains the losses from 2021 and 2022 respectively. Since, the tourists have reduced their journeys, and not to visit unnecessarily anywhere neither locally nor internationally. Since, it has a trickledown effect into the airline business especially for Jet2. The firm has to bear higher operating cost and from the last 3 years, i.e., from 2020 to 2022; Jet2 is unable to pay dividend to its shareholders which indeed reduces the credibility of the organization.
Table # 02 depicts the idea of Dividend Per Share (DPS) from the year of 2017 to 2022 and from the last two years, the company does not make any dividend disbursement due to liquidity issue.
(N.B. The company financial year ends on 31st March each year)
The results have been drawn from the cashflow statement as it shows the liquidity and solvency of the business. Furthermore, cash flow statement covers three things, such as, operating activities, investing activities and financing activities.
Projected data from 2023 to 2027 have been opted in order to know the financial position of Jet2 Plc. The empirical results denote that the firm will sustain losses from the stated years and that will reduce the operating activities of the business. The growth of the business is in an adverse condition because net losses will may raise the question of “going concern assumption” for the company in the foreseeable future. Besides, historical and projected cash flow statement is shown in table #03.
Analyzing the cash flow statement displays the net losses but after adding up nonfund expenditures like depreciation expense and amortization of intangible assets the accrual income is converted into cash basis. However, investing activities from year 2023 to 2027 shows the negative balances because Jet2 Plc intends to invest in the capital expenditures items so again it requires the outflow of the cash. Lastly, the financing activities has only one outflow, i.e., Long Term (LT) debt payment. In a nutshell, Jet2 projected economic benefits are in negative sign because the cash flow position shows the real crux of Jet2 Plc.
Summing up from the table # 03, the cash flow historical and projected figures indicate that the firm has to take some remedial actions in order to overcome this deficiency. Jet2 Plc makes the strategic plans in order to overcome this deficiency by using some bold actions. Otherwise, it will reduce the confidence of the stakeholders particularly for the shareholders who may diversify their portfolios in the aviation industry and especially for Jet2 company’s share, and they go for another alternative. Furthermore, it will shrink the shareholders wealth in the long term.
Weighted Average Cost of Capital (WACC) indicates that what should be cost of capital. WACC is applied when any organization intends to know what should be the cost of capital it bears on borrowing amount. LT debt is considered to be external equity and the firm has to pay borrowing cost at any cost irrespective of the business position and financial strength of the company. This cost should be treated as an external cost and tax shield advantage can be drawn from the organization. However, equity cost of capital means that how much amount is given to internal source of financers and normally they are the shareholders of the organization.
Jet2 Plc generates the financing activities from both of the sources namely internal and external. The assessment of Jet2 Plc is determined through table # 04 which is shown as follows:
Table # 04
Tax rate of Jet2 Plc is calculated on an average basis and that is based on operating before tax. The rate of tax is 20% as an average for 5 years. Risk free rate of return is 2.15% which means that if the investor invests the money in zero percent default risk so he/she can get the returns on its investments. Since, the high risk leads to high returns and assuming that the investors are risk lovers so if they get higher risks then, their ultimate target is that to get maximum returns on their investments. Debt to equity ratio is very high in London Stock Exchange (LSE) statistical report and it is witnessed 157.9% which is quite high. So, investors try to hesitate investing in LSE market because they know very well that the company is bound to pay its borrowing cost firstly and after that if any amount is left then it is given to preference shareholders and ordinary shareholders right arises at the last resort for getting dividend on their investments. Lastly, debt to capital employed ratio is 51% in Jet2 Plc as per the table # 04.
(Source: Internet Image)
Quantitative assessment can be shown by the following subheadings:
The discounted cash flow is a kind of method where the time of money is considered and checks the feasibility whether the project is feasible or not after completion of the time period. Table # 05 shows the discounted cash flow in terms of inflow and outflow of the project.
Table # 05
Table # 05 applies the WACC which is 12.5% and termial value is 10.5% respectively. Present Value (PV) indicates in the year of 2022 (as at March,31) as a value of 3% of total equity value. However, in the year of 20232026 represents a 21.5% which is again a quite high value. Since, the discounted cash flow shows that investors in the company and how much amount is discounted due to time factor.
Relative valuation approach is that what should be the share price of Jet2 Plc if it uses some kind of projections about the future. Investors are very keen to take the interest if the share price is jump to the next level. Since, the shareholders intend to get returns in terms of dividend yield and capital gain on the stock holding but if the price is persistent then, short term investors are unable to take chance in the Jet2 Plc. Table # 06 derives some information on the basis of historical data and projection about the share price of Jet2 in the forthcoming years.
Table # 06 shows EPS from 2021 to 2025. So, investors can make their share price on the basis of beta calculation but Jet2 does not show the implied value of the share price so it is difficult to calculate realistic value on the basis of valuation approach.
Sensitivity Analysis is used by Jet2 Plc which performs the function of “what if” analysis approach. WACC has been applied to check the sensitivity analysis and what should be the cost the firm has to bear generally. The sensitivity analysis is used in discounted cash flow for the forecast period. Table # 07 depicts the idea of sensitivity analysis approach.
As per the table # 07 denotes how the value is changed depending upon the WACC approach. Jet2 applied the several strategies for its sensitivity analysis approach for the period of 2022 to 2026. The ideal condition is 10.45% but it may not give a positive stand to generate future funds for its capital expansion project. The middle value, i.e., 12.45% seems to be adopted in order to get funds from internal and external sources.
The methodologies which are applied for NPV, DCF and sensitivity analysis are based on hypothetical values. As, we know that that the interest rate and discount factor may change year on year basis. So, one can not determine that accuracy of the methodologies which they apply are accurate, as the situation of Jet2 which is in a positive mode and turn into negative mode from year 2022,2023 and forthcoming years as well.
Jet2 Plc is dealing is airline business and it has a very good history before the pandemic situation occurs but after that the firm sustains the losses and the firm does not have a sufficient fund to make payment to its shareholders. There are several factors are there as the flight have been cancelled out for more than half a year and most of the people can not visit any other country without any emergency or office meetings at different places. The overall situation of the company as per the financial statement is as concerned the firm deteriorates its value in terms of profitability, liquidity and solvency of the business is also a big question. EPS, DPS, WACC and share price is reduced due to reduction in the profit and the shareholders lose the confidence while making their investments in the company. So, the financial statement reports and analysis reveal the potential investors may not invest in the company because the firm may have the negative net income for the upcoming years as well.