Wizz Air - Disappointing, but we recognised several positives - Instant Earnings Comment from Concorde

WIZZ AIR- Instant Earnings Comment

Recommendation:  BUY

Target price (12M): GBP 37.0 (unch.)

 

• Highlights: Wizz Air reported 3Q19 results today before the bell. In a nutshell, the company came out with a net profit of EUR 1.8mn vs. Bloomberg consensus estimate of EUR 14.3mn or our estimate of EUR 20mn, representing a negative surprise. Despite Oct./Nov. traffic being disappointing, Wizz delivered a PAX growth of 15% YoY in Q3. Thanks to improving load factor, which stood at 91.4% in the reported quarter, and strong ancillary recovery, total revenues grew 21.2 % YoY to EUR 513mn in 3Q19 compared to EUR 423mn in 3Q18. Ancillary revenues accounted for 43% of the total in the reported quarter, broadly in line with our expectation. The carrier reported an EBIT of EUR 0mn. It was driven by (1) the increasing fuel expenses due to hedges, which is considered as a one-off in light of the plunging oil prices and (2) higher pilot salaries and growing staff number (+20%+ YoY). Eliminating these negative impacts, we see ex-fuel costs were in line with our estimate. We also saw some positives in the report as Wizz Air confirmed FY19 profit guidance range of between EUR 270-300mn, after Ryanair slashed its guidance once again in mid-January. However, it will largely depend on external factors, like Brexit negotiations according to the statement.

 

• Guidance: The Management left the profit guidance unchanged, which was the major message of this report, in our view, after Ryanair came out with a profit warning in mid-January once again. As we expected in our latest report, RASK is likely to raise at a slower pace than the Management anticipated earlier due to declining fare prices in Q4. However, the strong ancillary recovery will offset this headwind after a new bag policy came into effect in Nov18.

 

• Outlook/Conf. call take-away: In terms of costs, according to the Management, ex-fuel CASK will likely fall from the beginning of the fiscal 2020 (Apr 2019) due to A321neo aircraft, higher utilization, whereas they are in talks with many airports to bargain better conditions and prices. In terms of fuel costs, Management sees an avg. jet fuel price of 600 USD/mT in FY20 if oil prices remains at this level. Wizz Air is committed to expand its fleet in the UK. Although, CEO Mr Varadi mentioned Luton is likely to run into infrastructural constraints soon, Wizz Air has a strong position and plans to expand Wizz Air UK operation over the next years as the UK market is resistant. Additionally, Wizz Air is seeking to capitalize on market consolidation as well. Turning to delivery issues, in case of late deliveries, the Management highlighted that Wizz receives significant compensation from Airbus. Airbus needs to pay penalty in case of missing deadlines.

 

• Recommendation: After we previously reviewed our model in mid-January, we reiterate our recommendation on BUY with a 12-m TP of GBP 37.0. We stress that Wizz is unlikely to earn a net profit of as much as EUR 301mn in FY19 after Q3 was hardly profitable, but the carrier will be able to lower fuel unit costs from the next financial year thanks to the beneficial oil market and operational improvements. In terms of staff costs, tightening labour market is expected to remain, but a significant avg. salary increase (10% YoY) is incorporated into our model. We also assume utilization to deteriorate further in FY20, but it will recover post FY20.

 

 

Gabor Bukta
analyst

CONCORDE SECURITIES LTD.

Alkotás Point
50 Alkotás street, H-1123 Budapest.
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