Wizz Air - We Lift PT To GBP 43 After Solid H1/20 Results

WIZZ AIR- Earnings Revision

Recommendation:  Accumulate (prev. Neutral)

Target price (12M): GBP 43.0 (prev. GBP 36.0)

• We upgrade Wizz Air to Accumulate from Neutral and raise our 12M TP from GBP 36 to GBP 43 (+15% upside potential), reflecting solid H1/20 results, strong cash generating ULCC model, and the appreciation of the sterling.
• Wizz Air trades at FY1 P/E of 13.4x and FY2 P/E of 11.3x multiples on our estimates (broadly in line vs. RYA’s FY1/FY2 P/E of c.13.5x/11.9x; EZJ’s FY1/FY2 P/E of c.13.5x/11.5x). We believe Wizz Air deserves higher valuation multiples as they can grow above the market average since capacity growth stalled in Europe). Wizz is expected to be capable of delivering two-digit EPS growth over the next couple of years. The carrier therefore looks attractive, thus we suggest investors to follow a Buy the Dip strategy for the stock.
• 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 for the Q2 earnings was predominantly due to three factors. One is that the market likely expected a profit guidance upgrade, but the Mgmt. disappointed investors. Second, future growth rate is much slower than they had earlier foreseen as Airbus has delivery issues over the flagship A321neo. Finally, RASK performance was weaker in Q2/20 compared to the previous quarter.
• Despite record H1 profit, this explanation is 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 airline market grows c7% YoY in the CEE and Wizz Air gives the half of this. As they mentioned on the conf. call, a significant expansion (like in Q4/20) result in RASK deterioration. In contrast, 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.
• In line with Management guidance, we lowered our FY profit forecast from EUR 368mn to EUR 352mn. In H2/20, Wizz Air has to stimulate the market via low ticket prices in order to maintain its historically high utilization rate and load factor, which very likely results in declining RASK performance in the second half of this financial year. We also highlight that unit ancillary revenues are very likely to add less value in H2 (c. EUR 3 and c. EUR 1 per PAX in Q3/20 and Q4/20, respectively). As a reminder, Wizz Air introduced new cabin bag policy in NOV/18, which had a meaningful positive impact on profitability over the last 12 months. In our view, higher passenger growth will not offset above-mentioned facts, but we feel that profit guidance range is taking into account a worst case scenario, where profit slumps on weaker-than-expected revenue growth, while fuel prices are on the rise.
• However, for FY20 starting in Apr/20, we expect improving profitability as a result of the lower fuel prices and slower pace of capacity additions. Analysing the market we see less capacity coming in the next quarters, which will support Wizz Air’s business model in the next fiscal year. Nevertheless, we also take into consideration that once the Boeing 737MAX returns to fly, this tendency will turnaround as RYA and Norwegian will add dozens of B737MAX aircraft to the market within 2-3 quarters, starting in April-May 2020, in our view. Despite that we believe RYA needs to focus on its core markets (UK, Spain) to gain its market share, thus we don’t expect a lot of cost-efficient MAX coming into the CEE markets as the profitability is adequate in the region.
• We expect net profit to reach EUR 414mn (+18% YoY) in FY21 vs. our previous forecast of EUR 416mn. Given the recent fleet guidance, we anticipate low double-digit capacity growth (+12% YoY) for the next financial year after the Company lowered its forecast. Lower rate of fleet expansion refers to Airbus’ delivery issues, which is over the company’s scope.
• On the risk side, we see limited downside risk for FY20 earnings. If Q3/20 would be profitable, Mgmt. should raise the upper end of its profit guidance range for this financial year. Economic slowdown, fuel price increase and Brexit, which are beyond the scope of the Company, still pose the biggest risks.

 

 

Gabor Bukta
Equity analyst

CONCORDE SECURITIES LTD.

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Rating	Trigger
Buy	Total return is expected to exceed 20% in the next 12 months
Accumulate	Total return is expected to be in the range of 10-20%
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Reduce	Total return is expected to be in the range of -10-(-20%)
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