Join our community of smart investors

Clear skies for Wizz Air's expansion plans

Growth is the key focus at Wizz Air and an improved pricing environment means it looks better placed to profit from its expansion
June 29, 2017

Wizz Air (WIZZ) operates the leading low-cost airline in central and eastern Europe (CEE), where it controls nearly two-fifths of the budget market. That's an exciting position to be in as there is significant long-term growth potential in the region based on the fact that airlines currently provide just 162m seats a year to CEE countries, compared with 1.8bn in western Europe, and people fly only 0.4 times a year on average in CEE compared with 1.8 in western Europe. Given expectations of high economic growth rates in CEE, there is considerable scope for catch up and low-cost carriers should be in a prime position to benefit.

IC TIP: Buy at 2318p
Tip style
Growth
Risk rating
Medium
Timescale
Long Term
Bull points
  • Improving pricing
  • Expansion plans
  • Growing passenger numbers
  • Long-term growth in CEE
Bear points
  • Decline in revenue per available seat kilometre
  • Impact of weak sterling

Wizz certainly boasts low-cost credentials. At the end of March, its fleet of 79 planes had one of the lowest average ages of any European airline at 4.4 years, making it highly efficient. This has helped make Wizz's cost per average seat kilometre before fuel among the lowest in the industry, as well as contributing to sector-leading margins, despite low ticket prices.

 

 

Given the exciting long-term prospects for CEE air travel and the strength of Wizz Air's model, management has been putting its all into growing the business. In the 12 months to the end of March there was a 20 per cent increase in capacity measured by available seat kilometres, and despite this expansion, load factor (bums on seats) actually increased from 88.2 per cent to 90.1 per cent. Management plans to keep its foot on the gas, with 23 per cent capacity growth planned this year.

However, last year the rewards from expansion were muted. Indeed, while passenger numbers across Europe have been strong, airlines have been falling into an old trap of overexpansion. This has put downward pressure on ticket prices and margins. So despite Wizz Air carrying so many more passengers last year, ticket revenue was only up 2 per cent - although some of this represented the pass through of lower fuel costs. And while passengers spent more on extras (an 80¢ rise in ancillary revenue per passenger to €27.5), underlying margins still fell sharply from 15.7 per cent to 14.8 per cent, resulting in largely unchanged underlying pre-tax profits of €225m despite a 10 per cent increase in sales.

But things could now be on the turn. While Wizz's low-cost model protected it from any major pain associated with the weaker pricing environment, other carriers - notably Alitalia - have not been so lucky and are cutting back on capacity. Indeed, while Wizz plans to ramp up its CEE capacity growth in its current financial year from 3.7m to 6.6m seats, capacity growth for CEE as a whole is expected to fall from 26.4m to 20.0m seats. What's more, profit guidance issued by Wizz at the time of the full-year results suggests the group is in for a good summer. Adjusting for the timing of Easter and currency movements, broker Barclays estimates that Wizz's pricing has improved from falls of 4 per cent (ex-fuel) to being flat, suggesting a major turn in the cycle. This is particularly impressive given Wizz's rate of expansion, and it should help counter the market's Brexit and sterling-related fears.

While our table shows Wizz with net cash, this excludes its debt-like lease liabilities, which are used to secure the use of planes and airport slots. These liabilities will not be required to be reported on companies' balance sheets until new accounting rules come through at the start of 2019. But if the liabilities are factored in, Wizz's 'leverage' rose last year from 1.4 times cash profits to 1.7 times. While the multiple is rising fast, it still leaves plenty of room for further expansion.

WIZZ AIR (WIZZ)
ORD PRICE:2,318pMARKET VALUE:£1.3bn
TOUCH:2,318-2,319p12-MONTH HIGH:2,430pLOW: 1,380p
FORWARD DIVIDEND YIELD:NILFORWARD PE RATIO:11
NET ASSET VALUE:1,659¢NET CASH:€768m*

Year to 31 MarRevenue (€bn)Pre-tax profit (€m)**Earnings per share (¢)**Dividend per share (¢)
20151.23183653nil
20161.43218165nil
20171.57237179nil
2018**1.93277205nil
2019**2.15324241nil
% change+11+17+17-

Normal market size: 1,000

Matched bargain trading

Beta: 0.28

£ = €1.13

*Excludes €156m restricted cash

**Barclays forecasts, adjusted PTP and EPS figures