easyJet: Forecast Assumptions and DCF Valuation

Educational content only. This article is not financial advice or a recommendation to buy or sell any security. Always conduct your own research or consult a qualified financial adviser.

This is part 4 of a 5-part series. Previous: Investment Thesis and Financial Analysis. Continue with Catalysts, Risks and Final Recommendation.

Forecast Assumptions

I forecast the company over a five-year period from FY26 to FY30, using FY25 as the base year.

Revenue

Revenue growth is expected to slow from the post-pandemic recovery period. A five-year CAGR of approximately 12% reflects continued demand for budget travel, growth in holidays and capacity expansion, partly offset by increasing competition and normalisation after the recovery period.

EBITDA margin

easyJet's FY25 EBITDA margin was approximately 14%. I forecast margin pressure in FY26 due to fuel cost risk and macro uncertainty, followed by partial recovery as operating productivity improves and the holidays division continues to grow.

Unearned revenue

Unearned revenue reflects customer payments received before flights or holidays are delivered. I forecast this to remain broadly stable to slightly higher as a percentage of revenue, supported by continued bookings and holidays growth.

Debt and interest

easyJet has a positive net cash position and continues to reduce lease reliance through aircraft ownership. Interest coverage is strong, but future financing needs will depend on how fleet capex is funded.

Terminal assumption

A 2% terminal growth rate reflects mature long-term nominal growth. Upside could come from stronger holidays growth and customer trade-down into low-cost travel. Downside could come from market share loss, capex pressure or weaker consumer demand.

DCF Inputs

| DCF assumption | Value | Reason | |---|---|---| | Forecast period | 5 years | Captures medium-term earnings and cash flow normalisation. | | Revenue CAGR | 12% | Capacity growth, passenger volumes, pricing/yield and holidays expansion. | | Operating margin | 3% | Continued cost pressure, partly offset by scale benefits and holidays growth. | | Tax rate | 25% | UK statutory corporation tax rate. | | Capex | FY26 £1.7bn · FY27 £2.3bn · FY28 £3.3bn · normalised at 10% thereafter | Based on management gross capex guidance for FY26–FY28. | | Deferred / unearned revenue | 20% of revenue | Based on historical deferred revenue levels relative to revenue. | | WACC | 12% | Reflects airline cyclicality, operating leverage, fuel exposure and balance sheet risk. | | Terminal growth | 2% | Mature long-term nominal growth rate. | | D&A | 7.4% of revenue | Based on FY25 group D&A as a percentage of FY25 group revenue. |

Valuation

I use a discounted cash flow model to estimate intrinsic equity value based on forecast free cash flows. Free cash flow is calculated from operating profit after tax, adding back depreciation and amortisation, then deducting capital expenditure and changes in working capital. The model uses a five-year forecast period, followed by a terminal value based on a long-term growth assumption.

Under the base-case assumptions, the model produces an enterprise value of £85.6m. After adding net cash of £602.0m, the implied equity value is £687.6m. Using diluted shares outstanding of 764m, this gives an implied share price of approximately 90p (£0.90) — versus the current market price of 470.10p (£4.70).

The valuation indicates downside versus the current share price. The key reason is that forecast free cash flow remains negative from FY26 to FY28 due to elevated fleet investment, before turning positive in FY29 and FY30. As a result, the present value of forecast free cash flows is negative and most of the valuation is dependent on terminal value.

Based on this DCF, the shares appear overvalued under my base-case assumptions. Unless operating margins improve faster than expected, capex normalises earlier or the company generates stronger free cash flow, the valuation does not support a Buy rating.

DCF Output

| Output | Value | |---|---| | PV of forecast FCF | −£1,762.55m | | Terminal value | £3,256.98m | | PV of terminal value | £1,848.10m | | Enterprise value | £85.55m | | Net cash | £602.00m | | Equity value | £687.55m | | Diluted shares outstanding | 764m | | Implied share price | £0.90 (≈ 90 GBX) | | Current market price | 470.10 GBX (£4.70) |

Reading the table. With most of enterprise value sitting in terminal value, the DCF is essentially saying "value depends on what happens after FY30." Small changes to capex normalisation, terminal growth or WACC swing the output materially — which is why I treat this output as one scenario rather than a target price.

Continue to Part 5: Catalysts, Risks and Final Recommendation →

Educational content only. This is not financial advice or a recommendation to buy or sell any security. Always conduct your own research or consult a qualified financial adviser.