So today Dart Group PLC (LON:DTG) closed up 16.41%. The share shot up today after management advised that results would be ahead of market expectations. It’s not really that suprising that the company’s share price shot up this much today after such news, given that on paper the share looks cheap. However, even though the company may appear to be undervalued, is it really a buy? Or are there too many potential risks that could derail the share price?
The company’s main revenue earners are its Jet2 & Jet2Holidays businesses. Jet2 is the airline business, Jet2Holidays the package holiday business. The company also has a distribution business called Fowler Welch, but this business only contributes about 5% of operating income; not that much.
Let’s look at some stats that point to the share being undervalued on paper (Click for link to annual report):
- Revenue for the company has steadily risen from £869m in 2013 to £1,729.3m in 2017
- Operating profit rose from £37.9m in 2013 to £103m in 2017
- The market capitalization even after today’s rise is only £1.12 B, with a P/E ratio of around 10
Granted, PBT dropped in 2017, but this was primarily because of investment in Jet2.com and a £10.9m charge for FX losses.
Everything is pointing to a continued increase in revenue and operating profit, correct?
Not necessarily.
If all goes well, sure, this share could be rising for years to come. However, because of the company’s reliance on its travel business, there are some potentially ugly risks that could derail revenue growth and as a result, cause the share price to fall:
- Brexit – many of the company’s packaged holidays are to Europe. No one currently knows what will be the outcome of the brexit negotiations and how this will impact travel. Potentially, it could become more expensive to travel (extra taxes etc), and this could affect the revenue from the packaged holiday business.
- Oil – the company has tried its best to hedge the price of oil, but oil has been steadily rising to the point that some airline fuel surcharges around the world are already going up. The company is aggresively expanding its Jet2 airline and purchased a number of Boeing aircraft to expand the fleet. However, the pressure of oil on the airline business cannot be ignored; this could seriously affect Dart’s growth plans for Jet2.
In summary, Dart Group PLC is a double edged sword. If all goes well with Brexit and Oil doesn’t increase significantly, continued revenue growth could continue and the current share price definitely looks cheap.
However, if there is a bad deal with Brexit and/or Oil goes sky high, Dart’s travel business, its main revenue earner, could be at risk.
As always, please do your own research before buying/selling this share; the opinions above are only my personal views.
