WZZAF - Wizz Air Holdings: Profit Recovery Encouraging But Net Debt Too High

2023-08-24 03:55:47 ET

Summary

• Wizz Air Holdings has seen a strong recovery in operating profit and revenue.
• Fuel costs have decreased, leading to a decrease in total CASK.
• However, the company's high level of net debt is a concern and until it decreases significantly, stock growth is expected to be modest.

Investment Thesis: I take the view that while a rebound in operating profit for Wizz Air Holdings is encouraging, the stock is likely to see modest growth due to high debt levels.

In a previous article back in December, I made the argument that Wizz Air Holdings ( WZZAF ) may see little upside in the short to medium-term, as higher fuel costs and persistently high long-term debt could impede upside in spite of revenue growth.

Since then, in spite of seeing upside in the interim - the stock has reverted to a similar level price of that seen last December - with Wizz Air Holdings trading at a price of 2312 GBP per share at the time of writing:

The purpose of this article is to assess whether Wizz Air Holdings has the ability to see growth from here taking recent performance into consideration.

Performance

When looking at the most recent earnings results for Wizz Air Holdings, we can see that total revenue is up significantly on last year - by over 50%.

In addition, the company has seen a comfortable recovery to €79.9 million in operating income.

I had previously made the argument that in spite of encouraging revenue growth for Wizz Air Holdings, higher fuel costs have the potential to impede profitability going forward. However, the recovery we have been seeing over the past year has suggested otherwise - with a recovery to €61.1 million in profit from a loss of €452.5 million in the same quarter last year.

To analyse fuel costs in more detail, I decided to generate a breakdown of the total CASK (cost per available seat kilometers) for Wizz Air Holdings since the 2019 financial year (note that 1 = Q1, 2 = H1, 3 = Q3, 4 = FY, the financial year 2020 was excluded due to the COVID-19 pandemic) .

From the above, we can see that while total CASK had seen an increase across all periods in 2023 - this was still lower than that of observed in 2021 (with the exception of H1 2021).

Essentially, this indicates that even with fuel prices having seen a significant increase last year - the cost of operating each seat kilometre has been decreasing on the whole. We can see that total CASK is down to €4.02 in the most recent quarter as compared to €4.80 in the previous year. We can see that while other costs either saw a marginal increase or decrease - that of fuel costs is down considerably on that of last year:

From this point of view, while I had previously expressed concerns that higher fuel costs might impede profitability - this has not been the case and we have seen fuel costs decrease considerably from that of last year.

The company's net debt has also fallen marginally to €3,779.8 million for the quarter ended June 2023 as compared to €3,892.8 million for the quarter ended March 2023.

With that being said, we can see that net debt is still markedly higher than in previous years:

Source: Figures sourced from historical press releases of Wizz Air Holdings. Net debt figures in € millions.

My Perspective

As regards my take on the above results and the implications for the growth trajectory of the stock going forward, the drop in total CASK has been encouraging - and the company has comfortably returned to profitability as a result of declining costs as well as revenues continuing to see strong growth.

With that being said, we have seen that net debt is now substantially higher than in previous years. In spite of Wizz Air Holdings having substantially bolstered its operating income from the same period last year - the stock is still trading at the same level as that of last December.

I take the view that one of the major reasons for this is that investors firstly want to see evidence that the company can reduce its net debt before significant upside can be expected. At this point in time, the company is prioritising growth - as evidenced by the fact that the company has increased its number of aircraft by over 15%, with total flight hours having increased by 20%:

While this growth is encouraging - Wizz Air has had to substantially increase its debt load to fund such growth and this is being reflected in lack of growth in the stock price.

With net debt of €3,779.8 million and total cash of €1,791.6 million for the quarter - net debt stands at over twice the company's available cash.

From this standpoint, I take the view that given the strong recovery in operating profit yet lackluster growth in stock price - Wizz Air Holdings now needs to demonstrate that it can substantially reduce its net debt before we see any meaningful upside in the stock.

Conclusion

To conclude, Wizz Air Holdings has seen a strong recovery in operating profit, and my prior concern regarding higher fuel prices potentially impacting profitability has not turned out to be the case.

However, high levels of net debt are a concern for the stock. While such debt has funded growth, this cannot continue indefinitely. As such, I take the view that until we see a significant decrease in net debt - growth for the stock is likely to remain modest.

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