Wizz Air - Profit Soars, Guidance Upgraded, Management Still Cautious (?), But Confident

WIZZ AIR- Instant Earnings Comment

Recommendation:  Neutral

Target price (12M): GBP 36.0 (unch.)

 

• Wizz Air published its Q2/20 report today, BMO. The carrier reached a net profit of EUR 299mn (+30% YoY) in Q2/20, our estimate of EUR 280mn (+6.8%) and consensus estimate of EUR288mn (3.8%). Profit guidance was tightened to the range between EUR335-350mn (previously EUR 320-350mn), furthermore the Company expects slightly declining ex-fuel CASK for H2/20. In our view, better-than-expected results were definitely driven by cost discipline as CASK relating to staff, depreciation and passenger compensation dropped significantly on a yearly basis.
• Wizz Air reported stunning growth rates for Q2/20: (1) Total seat capacity +15.4% YoY; (2) PAX +15.9% YoY; (3) LF +0.4ppts YoY @ 95.5%. The faster pace of growth was attributable to the recent supporting market conditions (e.g. airline failures), which will result in an ASK growth of 22% in H2/20.
• Net revenues came in at EUR 980mn (+19.2% YoY), compared to our estimate of EUR 991mn as the traffic had to be stimulated by low fares as a result of the high growth rate. Ticket revenues totalled EUR 577mn (+9.3% YoY), 2.3% below our estimate. Ancillary revs amounted to EUR 402mn (+37% YoY), 0.6% ahead of our estimate.
• Operating results were better than expected, totalling EUR 322mn in Q1/20 in EBIT terms vs. our estimate of EUR 308mn. Staff cost growth accelerated at a slower pace as the launch of Wizz Air UK put pressure on margins in the same period of last year.
• Fleet: The carrier reported slower growth rate for FY21 compared to the previous guidance, whereas it is expected to ramp-up in FY22. Accordingly, Wizz Air is set to expand its fleet by 13 new aircraft by the end of Mar/21, which implies a capacity growth of 12-13% (vs. our estimate of 18%) for the next financial year.

 

latest guidance update

	2020 Financial Year	Previously
Capacity growth	20%
Average stage length	Moderate increase
Load Factor	+1 ppt
Fuel CASK	7%
Ex-fuel CASK	Slightly negative	Broadly Flat
CASK	+2%
RASK	Slightly positive
Net profit	€ 335-350 million	€ 320-350 million

Source: Wizz Air

• call takeaways: Vienna is a battlefield, but highly efficient Airbus neo aircraft would make Wizz Air possible to be the structural winner in the mid-term. Profitability in Vienna is around break-even, while all competitors lose money. CEO is confident that profit guidance can be delivered by the company as they stress-tested the Co.’s own worst case scenario. Wizz Air penetrates the market in the CEE. Wizz doesn’t only want to exploit the monopolistic markets, but wants to create a real competitive advantage in other markets as well. Wizz built a very strong cash position to be capable of financing its growth at low financing costs, because they have a huge commitment to lease aircraft orders. However, they don’t intend to pay dividend. They stressed that once again that they are not interested in M&A, rather looks for opportunities to acquire other assets, like slots. Between Dec/19-Feb/20, Wizz grows 26% YoY in ASK terms, which will have a negative impact on profitability as a result of the market stimulation via its ultra-low fares. When RYA and Buzz came up on call, CEO highlighted that Wizz Air competes against 4 operational models when we compare the carrier to Ryanair, as RYA has 4 subsidiaries in different markets. But one fact is that Wizz is better on costs. Regarding the further network expansion, CEO said that it’s more difficult to find slots and growth opportunities in Westerns Europe. As many airports face slot constraint, therefore Wizz Air wants the business to be built in Eastern Europe and Middle East, where Mgmt. pursues negotiations with governments. Fleet is foreseen to be expanded by +13 aircraft in FY21 compared to +22 aircraft, presented in Q1/20.
• Recommendation: We are of the view that Wizz Air is fundamentally strong and operates amid more favourable conditions in the CEE region than rivals in Western Europe. We feel that the negative market reaction in the morning was predominantly due to three factors. One is that most of the analysts likely expected a profit guidance upgrade, but the Co. surprisingly missed it. Second, future growth rate is much slower than they had earlier foreseen. Finally, RASK performance was weaker in Q2/20 compared to the previous quarter. Despite record H1 profit, this explanation was amplified by the Management’s cautious view on winter fare environment as they will expand by 26% YoY between Dec/19-Feb/20. However, we feel that lower growth rate can support the profitability in FY21. Total market grows c7% YoY in the CEE and Wizz Air gives the half of this. As they mentioned on the call, a significant expansion (like in Q4/20) result in RASK deterioration. Controversy, a slower growth rate could improve both yield and RASK indicators, which measure the unit revenue performance of the carriers. All in all, we maintain our view that the profit guidance is very cautious, which indicates a net loss of EUR 20-30mn for H2/20.
• We will update our target price soon, but we reiterate our neutral recommendation at this stage.

 

 

 

Gabor Bukta
analyst

CONCORDE SECURITIES LTD.

Hillside
55-61 Alkotás street, H-1123 Budapest.
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MEMBER OF THE CONCORDE GROUP

 

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