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This is a case recommendation. The company will be included in our equityresearch universe as long as it holds price potential justifying a BUY recommendation. When this is no longer the case, we will discontinue our coverage although our recommendation is ACCUMULATE, REDUCE or SELL.
Publisher: Jyske Markets Vestergade 8-16 DK - 8600 Silkeborg Senior Equity Analyst Robert Jakobsen +45 89 89 70 44 jrj@jyskebank.dk Equity Analyst Lars Terp Paulsen Translation: Translation Services
Please note: the 2010 accounting year is from March 2009 to March 2010)
Price development
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Fundamental valuation Risk News flow 12-month price target Current price
Accounts/key figures
(EURm) S ales Operating result 2009R 2.942 144 -180 5% -7,0% 5,3% -0,1 -26,1 29,5 2,1
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Ryanair
DJ EURO STOXX
Share information
High/low latest 12 months Price trend (3/12 months) - relative to DJ EUROSTOXX Market value (EURm) Free float Ave. daily volume (EURm) Reuters Bloomberg 4/3 -7%/-8% 0%/-26% 4.844 95% 12 RYA.I RYA ID
RYANAIR BUY
Equity Research Industry 10 May 2010 Jyske Markets
We start our coverage of Ryanair with a BUY recommendation and a price target at EUR 4.5. Here are the reasons behind our decision:
Source: Ryanair High growth: Ryanair has, among other things, used its strong market position to win market share during the global slowdown. While many of the traditional airline companies have been forced to reduce capacity and close down routes (sold or grounded aircraft) and some medium-sized companies have even been forced to close down, Ryanair has raised its number of passengers by 14% in 2010 and opened further routes. This trend will continue over the coming years, which supports our anticipations of solid passenger growth. Ryanair has guided that it expects to open 146 new routes (an increase above 10%) in 2010 and transport 80m passengers in 2012 corresponding to annual passenger growth at approx. 10%.
RYANAIR BUY
Equity Research Industry 10 May 2010 Jyske Markets
The prospects of rising airfares, declining costs and passenger growth will support Ryanair's earnings capacity
Over the coming years, we particularly see three important drivers that can lift Ryanairs earnings capacity considerably. 1) Rising ticket prices: In the 2010 accounting year (ends at endMarch) Ryanair is expected to have lowered its average ticket price by 15% y-o-y to only EUR 34. This price reduction has primarily been driven by Ryanairs strategy about delivering high passenger growth despite the global slowdown, which has of course affected the willingness to travel on behalf of Europeans. If the price decline in 2010 is combined with the fact that Ryanair has the lowest prices by far (e.g. Ryanairs average airfare is no less than 52% lower than its arch rival Easyjets airfare), there will, in our view, in line with a stabilisation of the European macroeconomy be basis of raising the airfare by at least 4-5% over the coming years. The chart below shows that Ryanair has room to raise its airfare. Ryanirss airfares are markedly lower than its rivals airfares
300 250 200 150 100 50 0 British LufthansaAir France Iberia Aer Lingus EasyJet Airways Average airfares 2010 Ryan
Source: Ryanair 2) Declining unit prices: You need to go far back to find a company that is more obsessed by reducing its cost base than Ryanair. Since 2000 Ryanair has reduced its average costs per plane ticket by impressive 42%. This has, among other things, happened by renegotiating airport contracts on an ongoing basis, ensuring that all passengers check in through the internet, limiting wage increases, freezing wages, making productivity improvements, rearranging routes, making passengers reduce their check in luggage, etc. In the 2010 accounting year, Ryanair is well on its way to reduce costs per plane
RYANAIR BUY
Equity Research Industry 10 May 2010 Jyske Markets
ticket by 4-5%, which is impressive compared to its closest rivals, which have due to declining passenger traffic suffered from rising costs per passenger. Over the coming years, Ryanairs target is to reduce its unit costs further, which seems very aggressive. We will be satisfied with just unchanged levels. The chart below shows the number of passengers per employee in Ryanair and some of its rivals. Number of passengers per employee
10000 9000 8000 7000 6000 5000 4000 3000 2000 1000 0 Ryanair Easyjet British Airways Air France Lufthansa
3) High passenger growth in 2011 and 2012: Growth in 2011 and 2012 is, among other things, to be driven by more bases in Central & Eastern Europe 2 (an area with several hundred million inhabitants). In May, Ryanair will open its first base in Central Europe in Kaunas, Lithuania. Two aircraft are to transport approx. 1m passengers a year to 18 different destinations. In our view, there are good chances that Ryanairs discount concept will be successful in Central and Eastern Europe hence, we also expect that the management will aggressively pursue the potential by opening many new bases in this area. Furthermore, we still see growth opportunities in Western Europe. Impressive passenger growth at Ryanair
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RYANAIR BUY
Equity Research Industry 10 May 2010 Jyske Markets
Source: Ryanair In the period from March 2009 to March 2012 Ryanair will see an inflow of 124 new Boeing 737s. At the end of March 2010 Ryanair had 232 aircraft. This figure will over the next two years increase to 294. Hence, Ryanair may in the 2010-2012 accounting years deliver annual passenger growth at 10% corresponding to its target of 80m passengers in 2012. Passenger growth and capacity expansion
2009 2008 Development in Ryanairs capacity of Boeing 737 aircraft: 36 Inflow of Boeing 737 aircraft -6 Outflow of used Ryanair aircraft* 163 Ryanairs aircraft fleet Capacity growth y-o-y 23% Ryanairs anticipations to passage growth: Number of passenger (m) 50.9 Growth in number of passengers: 20% 35 -17 181 11% 58.6 15% E2010 54 -3 232 28% 66.3 13% E2011 50 -10 272 17% 73 10% E2012 25 -3 294 8% 80 10% E2013 15 -10 299 2% 85 6%
4) Increase sales of related products: Ryanair generates additional sales of EUR 10 on average for each of its passengers. This is, among other things, through fees, commissions on sales of train tickets, hotels, car rent and travel insurances, online advertising at ryanair.com, telephone calls during the journey, food and beverages, etc. We expect that the additional sales will increase over the coming years driven, among other things, by the launch of new products (e.g. offering mobile broadband, selling individual films or other entertainment (e.g. financed by advertisements), games (e.g. casino games, bingo, etc.), travelling packages, tickets to sport events, city passes and musicals) and by its targeted focus on making a higher proportion of the passengers buy some of its services.
Due to the prospects of rising airfares, declining unit prices and passenger growth Ryanair will over the coming years deliver solid sales growth and EPS growth, which is a main reason behind our BUY recommendation. In the period 2010-2013 we expect that Ryanair can deliver average EPS growth at 18%, so that Ryanair in 2012, at the current share price, is trading at a P/E at 9X, while the share has historically (past five years) been trading at a P/E of 18X.
Ryanair is growing, but the focus of attention will soon shift to the creation of additional value for the shareholders
Ryanair is known for its aggressive growth plans. The target has been year on year to carry an increasing number of passengers. Whereas Ryanair in 2002
RYANAIR BUY
Equity Research Industry 10 May 2010 Jyske Markets
carried 10 million passengers, the figure has in 2009 grown to 66 million growth which has created Ryanairs economies of scale. This on-sided focus on passenger growth has, however, had a price, namely that we have seen less focus on creating shareholder value. The tone among CEOs at Ryanair is gradually changing in favour of the shareholders. Ryanairs CEO, Michael Oleary, recently commented that after the 2012 accounts, Ryanair will have less focus on passenger growth and more focus on optimising the business and hence the earnings power. A shift which will in our view be appreciated by many investors. For the 2013 financial year, Ryanairs target is to double EBIT in relation to the EUR 400m in 2007. We point out, however, that it is only a target and no official forecast from Ryanair, which is also reflected in the consensus estimate for 2013 which is at EUR 652m, but if Ryanair attains EUR 800m, the valuation of the share will be a 2013 P/E of 7! It should be mentioned that an important condition for attaining EUR 800m is that the oil price stabilises around USD 70 per barrel.
Attractive valuation:
In terms of our DCF model, peer-group analysis and compared with the historical average, Ryanair has an attractive valuation. DCF model: Our DCF model estimates a fair value of EUR 4.0 and a 12-month price target of EUR 4.3 (the price level was EUR 3.4 on 10 May 2010). A price target which is, among other things, based on the following central presumptions: WACC at 8.9%, based on a beta of 0.95, a market risk premium of 5.9% and a 15-year risk free interest rate of 3.8%. Average annual sales growth during the budget period (2010-2019) of 5.4% compared with the historical figure (latest five years) of 22%. An average annual EBIT margin of 14.6% during the budget period compared with the historical figure (latest five years) of 14.1%. Sales growth, EBIT margin and EPS growth
35.0% 30.0% 25.0% 20.0% 0.20 15.0% 0.10 10.0% 5.0% 0.0% 2006 -5.0%
Sales growth Operating margin Tax rate EPS (r.h.s.)
0.50
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-0.10 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 -0.20
RYANAIR BUY
Equity Research Industry 10 May 2010 Jyske Markets
Our peer group analysis should be taken with a grain of salt. There are particularly two reasons behind this: 1) several of the nearest rivals are also in 2010 expected to report red figures on the bottom line, therefore they are not included in the calculation of P/E and 2) Ryanair reports non-calendar accounts i.e. the group will already release its full-year 2010 accounts at the end of March. So the 2011 accounts will include nine months of 2010. Nevertheless, Ryanair is measured on 2010 and 2011 P/E as well as EV/EBITDA trading at a discount compared with the sector.
Peer group analysis
Company RYANAIR HOLDINGS EASYJET AIR BERLIN DEUTSCHE LUFTHANSA BRITISH AIRWAYS AIR FRANCE-KLM JETBLUE AIRWAYS SOUTHWEST AIRLINES CHINA EASTERN AIRL. 'A' Market-weighted average Simple average P/E(2010) 17.7 13.6 #NA #NA #NA #NA 13.9 22.5 175.1 105.0 34.7 P/E(2011) 15.7 9.3 16.9 120.0 #NA #NA 10.2 18.0 38.3 32.9 25.4 EV/S(2010) 1.8 0.6 2.2 0.2 0.6 0.4 1.0 0.9 2.4 1.6 1.1 EV/S(2011) EV/EBITDA(2010) EV/EBITDA(2011) 1.5 8.3 7.3 0.5 6.1 4.6 2.0 50.3 36.0 0.2 3.5 2.7 0.6 12.2 5.2 0.4 16.3 5.0 0.9 6.0 5.6 0.8 6.6 5.9 1.8 42.2 13.2 1.3 27.1 9.5 1.0 16.8 9.5
Source: Bloomberg The development in Ryanairs P/E and the current estimate for 2010 Ryanairs 2010 P/E at 17x must be seen in the light of the fact that the company decided to reduce their ticket prices by 15% y/y to create passenger growth (13% y/y) during a period of time when most rivals are surrounded by negative growth. So although the financial year 2010 has also been a difficult period of time for Ryanair, the share is trading in line with the historical average (latest five years) which is 18x. As mentioned above, we anticipate that the group will in the coming 12 months deliver solid earnings growth.
The share has been hit by the oil price and macroeconomic downturn
As appears from the table below, the Ryanair share has lost ground in recent years. The price decline from the approx. EUR 6 to EUR 3.4 EUR was primarily boosted by rising oil prices. Due to the companys strategy about solid passenger growth Ryanair has decided not to pass the higher oil prices on to the ticket prices, a decision which obviously affected the earnings power. Finally, the macroeconomic recession which affected consumers incentive to travel has obviously also put a damper on the share price. Since then, the oil price has risen less fast, and we are hopefully moving towards macroeconomic stabilisation. Both situations are not yet (fully) reflected in the share price. Price development of the Ryanair share over the past five years
RYANAIR BUY
Equity Research Industry 10 May 2010 Jyske Markets
7 6
The share is under pressure by e.g. a rapidly rising oil price, which Ryanair has difficulties passing on to its
The Ryanair share is rather stable, while the financial crisis is powering ahead.
jun 2005
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Source: Datastream
Highest risks
Rising oil prices: in the 2009 financial year (includes nine months of the 2008 calendar year), Ryanairs costs to jet fuel rose by just below 60%. A price increase which the company decided not to pass on to its customers - among other things, because it is Ryanairs policy never to impose a fuel adjustment factor. Ryanair uses forward contracts to hedge part of the oil requirement for up to 18 months ahead in time. USD strengthening: a strengthening of USD against EUR will not be to the benefit of Ryanair since it will make the aircraft as well as the jet fuel more expensive. A 10% strengthening of USD will affect the net profit by EUR 190m. Image: Ryanairs image has been strongly dented over the years. The media have on several occasions claimed that Ryanair treated its passengers badly for instance a Ryanair aircraft landed in another airport without informing the passengers or Ryanair forced its passengers to wait for several hours in the airplane without offering them anything to drink etc. stories which have dented Ryanairs image. Although the ticket price is the most important parameter when customers choose their air travel, Ryanair risks getting so bad an image that consumers will only fly Ryanair if the ticket price is somewhat cheaper than the alternatives. Insufficient passenger growth: as appears from the table on page 5, Ryanair is facing a capacity expansion in the coming three years whereas passenger growth does not follow suit at the same pace. If Ryanair has problems filling its new aircraft, it will dent the cost base significantly and the costs per passenger will increase. Rising costs: for one reason or the other, Ryanair will have difficulties lowering or maintaining its costs per plane ticket. Falling incentive to buy: a new macroeconomic downturn, a major terrorist attack in Europe, one of Ryanairs aircraft crashes or other events which will have an adverse effect on the incentive to travel among Europeans. Poorer conditions at the airports: it will be increasingly difficult for Ryanair to sign attractive agreements with new and existing airports. Strike?: disagreements among the management and Ryanairs crew. For instance, we may see disagreements after the Ryanair management introduced a halt to wage increases in the financial years 2009 and 2010. New CEO: Ryanairs CEO, Michael OLeary, will retire. OLeary has definitely been an important
apr 2009
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RYANAIR BUY
Equity Research Industry 10 May 2010 Jyske Markets
driving force behind Ryanairs success, and, of course, there is no guarantee that Ryanair can find similar capacity. New strong rival: as mentioned above, Ryanair today has a unique cost advantage compared with its closest European rivals. Still, it is not unlikely that another successful low-cost supplier wishes to expand into Europe, such as Southwest Airlines (USA). A share with wide price fluctuations: in historical terms, the Ryanair share has been subject to wide fluctuations. Although we anticipate a period of macroeconomic improvement, there is no guarantee that the share will not decline even further. Low visibility: generally, Ryanair has a poor visibility when it comes to estimating the development in the coming quarters. Typically, the group has good visibility approx. three months ahead in time, and subsequently it becomes very blurred. Due to the poor visibility, investors should be prepared that the company may announce major up and downgrades or quarterly accounts fluctuating according to consensus estimates. In the graph below EPS for the quarter has been compared with the forecast EPS.
Expected EPS
Price triggers
Extraordinary dividend of 10%-20% is possible in 2-3 years: CEO, Michael OLeary, announced that Ryanair is planning to pay extraordinary dividend in 2-3 years. For an airline company, Ryanair has a strong balance sheet (shortand long-term debt is in line with Ryanairs liquid assets of EUR 2.3bn). As from the 2012 accounts, Ryanairs Capex investments will automatically decline since Ryanair will buy much fewer aircraft from Boeing. Combined with the increased focus on an optimisation of operations, Ryanairs cash flow will increase noticeably from 2012 to 2013 and onwards. A dividend of EUR 500m1,000m corresponding to 10%-20% will not be unlikely. After 2012-2013 Ryanair can pay a similar dividend every 2-3 years. Investors believe that Ryanair will attain its targets: the equity market gains confidence that Ryanair will double its EBIT from 2007 to 2012.
RYANAIR BUY
Equity Research Industry 10 May 2010 Jyske Markets
Successful in Central and Eastern Europe: Ryanairs expansion in Central and Eastern Europe is successful. Rising ticket prices: Ryanair manages to lift its ticket prices without any noticeable effect on passenger growth. Rising ticket prices during a period of time when investors expect so are in our view one of the most important price triggers. In June, Ryanair will announce its 2011 forecast for the trend in its ticket prices. Following the dramatic price decline in 2010 (-15% y/y) it does not seem unrealistic that Ryanair will guide a fair increase for 2011. Idle capacity: several large regional rivals are forced to close down (or go bankrupt) a fair share of its regional routes. Ryanair lurks in the wings to snatch idle capacity. Falling airport taxes: a major battle occurs between airports either to gain or maintain Ryanair at their airport. For the airport, an agreement with Ryanair is often the shortest road to creating passenger growth and breathe life into local tourism. Even during the deepest macroeconomic downturn for several decades, Ryanair has proved that the company can deliver solid passenger growth whereas the majority of its rivals are reporting declines. The keener the competition Ryanair can create among airports, the lower the taxes will the company have to pay and the better the airports (closer to the cities) can Ryanair get. Away with tourist taxes: the UK and Ireland abandon, change or lower their tourist taxes. The two countries have introduced a GBP 10 tourist tax per passenger, a decision which has according to Ryanair dented the traffic. Ryanair particularly finds its unreasonable that the tax is the same whether it is a transatlantic route or a local flight from for instance London to Dublin.
RYANAIR BUY
Equity Research Industry 10 May 2010 Jyske Markets
Appendix:
Who is Ryanair:
Ryanair was established in 1985 with a capital base of GBP 1. In the early years, the 25 employees carried 5,000 passengers between Waterford, Ireland to Gatewick, London. In 1986, the company added a second route flying Dublin-London hence challenging British Airways and Aer Lingus which at this point in time held a duopoly on the route (with resultant high sales prices). An opportunity which Ryanair did not fail to grasp. From the beginning, Ryanair set its ticket prices considerably below those of the two rivals, and in 1986 Ryanair ended up flying 16 times more passengers than in 1985. In the years up to 1989, Ryanair reported solid growth, but in 1990 British Airways and Aer Lingus stroke back, which resulted in a major price war. This price war ended up with Ryanair reporting a net loss of GBP 20m a large loss for a minor unestablished airline company. To rescue the company, restructuring measures were implemented, and the management decided only to use one type of aircraft in the future (Boeing 737) and copy Southwest Airlines low-cost business model; Ryanair wanted to be cheapest on all routes. A courageous target for an airline company which had at this point in time still not seen any black figures on its bottom line. In 1991, the incentive to travel was generally hit hard by the Golf War but nevertheless, Ryanair reported its first profit. Due to Ryanairs low-cost concept, the airline became one of the largest players in the European airline market. Whereas Ryanair in 1991 carried 0.7 million passengers (primarily from or to Dublin), the figure had in 2010 grown to 66 million passengers with more than 200 Boeing 737 aircraft, distributed on 1,000 routes. This makes Ryanair Europes largest airline company. Only 15% of the traffic is created to and from Ireland. Ryanairs 39 bases in Europe
Michael OLeary Ryanairs CEO, Michael OLeary, joined Ryanair back in 1987, and in 1991 he became a member of the Board of Directors. He has managed to brand Ryanair, through his 100% focus on cost-cutting measures, growth and not least his bold /outspoken announcements. Announcements which are often related to the rivals, the airline authorities or the EU. Announcements which investors should take with a grain of salt. This is not to say that his financial
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Equity Research Industry 10 May 2010 Jyske Markets
expectations of Ryanair should not be taken seriously. DCF summary
2010 Sales growth EBIT margin Tax rate WC as a % of sales CAPEX (excl. write-downs) as a % of sales Sales EBIT before goodwill amortisation Tax of EBIT before goodwill amortisation NOPLAT Changes in working capital CAPEX (excl. write-downs) Gross investments Free cash flow NPV of free cash flow NPV of terminal value Value of operations, excl. options Existing employee options/warrants Future employee option/warrants/equities Value of operations Associated companies Minority stakes Others obligations NV of net-interest bearing debt Shareholder value Number of shares Fair value per share . -1.8% 12.7% 10.0% -36.0% 14.8% 2,889 367 -37 330 25 429 454 -124 2,039 3,810 5,848 -18 0 5,831 0 0 0 52 5,883 1,486 4.0 2011 15.0% 12.7% 11.0% -35.3% 18.4% 3,322 422 -46 376 -132 611 479 -103 2012 14.0% 15.3% 12.0% -34.6% 8.3% 3,787 579 -70 510 -137 315 178 332 2013 4.0% 16.0% 13.0% -33.9% 6.1% 3,939 630 -82 548 -25 239 214 334 2014 1.0% 15.0% 13.0% -33.2% 3.3% 3,978 597 -78 519 14 132 146 374 2015 4.0% 16.0% 13.0% -32.5% -4.8% 4,138 662 -86 576 -25 -199 -224 800 2016 4.0% 16.1% 13.0% -31.9% 5.8% 4,303 693 -90 603 -26 250 224 379 2017 4.5% 15.3% 13.0% -31.3% 4.4% 4,497 688 -89 599 -33 199 166 433 2018 5.5% 15.1% 13.0% -30.6% 6.5% 4,744 716 -93 623 -48 309 262 362 2019 3.0% 14.8% 13.0% -30.0% 3.6% 4,886 723 -94 629 -14 178 164 465 Hist. av. Aver. 5 year 5.3% 14.9% 12.4% -32.9% 6.7% 4,048 608 -76 531 -40 246 206 325 22.1% 14.1% 8.0% -36.7% 17.6% 2,184 312 -30 341 -156 392 237 104 3.8% 6.1% 1.0 9.0% 25 yrs
Risk-free interest rate Market risk premium Beta WACC CAP period
Basic
Pessimistic: 1 percentage point lower sales growth and profit margin
RYANAIR BUY
Equity Research Industry 10 May 2010 Jyske Markets
RYANAIR BUY
Equity Research Industry 10 May 2010 Jyske Markets
Accumulate
Neutral
Reduce
Sell
Financial models Jyske Bank employs one or more of the following models: Discounted cash flow (free cash flow), Economic Value Added and the dividend model to determine the fundamental value of a company. The fundamental value is compared to a relative valuation based on multiples such as P/E and EV/EBITA. The recommendation and the price target are moreover adjusted for the expected news flow and the market sentiment based on knowledge of the industry and company-specific circumstances. Jyske Banks recommendations take into account the expected development in the equity market, the various sectors and company-specific circumstances. Risk Investment in this share is associated with a risk. Movements in the equity market, the sector and/or news flows, etc. regarding the company may affect the price of the share. See the front page of the research report for our view of the risk associated with the share. The risk factors stated and/or calculations of sensitivities in the research report are not to be considered all-encompassing. If the share is traded in a currency other than the investors base currency, the investor accepts an FX risk. In connection with an ADR or similar papers, the FX risk exists relative to the currency in which the underlying share trades. Update of the research report The planned update of the report will be prepared immediately upon the release of the companys financial statements. See the front page for the initial date of publication of the report. All prices stated are the latest closing prices before the release of the report, unless otherwise stated.
RYANAIR BUY
Equity Research Industry 10 May 2010 Jyske Markets
Recommendation BUY ACCUMULATE NEUTRAL REDUCE SELL
Source: Jyske Bank
Return relative to the performance of the general equity market >5% 0 to 5% 0% 0 to -5% < -5%
Share recommendation concepts Our recommendations are relative to the market development and are based on an evaluation of the forecast return within the coming 12 months. The forecast return is the difference between the current price and our 12-month price target (the price target includes the projected dividend). A positive recommendation (BUY or ACCUMULATE) is based on expectations that an investment in the share will yield a return above the general equity market. On the other hand, a negative recommendation (REDUCE or SELL) implies that we expect an investment in the share to yield a return below the general equity market. Since our recommendations are relative and risk-adjusted, it is possible to compare our recommendations across sectors and risk categories. In addition, the potential is stated in absolute terms via our price target. It should be borne in mind, however, that the recommendation is the anchor. A BUY recommendation is a BUY recommendation until the recommendation has been changed, also in the event that price increases have taken the price "too close" to the price target. The future and historical returns estimated in the research report are stated as returns before costs since returns after costs depend on a number of factors relating to individual customer relations, custodian charges, volume of trade as well as market-, currency- and product-specific factors. It is not certain that the share will yield the stated expected future return/s. The stated expected future returns exclusively express our best assessment.