2024-01-04 07:00:00 ET
Summary
- Wizz Air’s revenue is growing impressively, driven by inflationary benefits and the expansion of its fleet.
- With its load factor exceeding 90% despite this, Wizz is well-placed to maintain its current trajectory.
- Management is planning a significant expansion East alongside market share in Europe, with a substantial orderbook that materially rivals its peers. Should this be delivered, growth will exceed 10%.
- Wizz’s margins are fantastic, with scope for an EBITDA margin in excess of 20%. This is currently funding expansion but positions Wizz for substantial distributions in the future.
- Wizz is outperforming its peers yet is trading at a ~69% discount, implying value. We believe its performance and valuation now warrant a buy rating.
Investment thesis
Our current investment thesis is:
- Wizz’s recent performance has shown the successful revival of its growth story, with profitability and revenue generation significantly above its pre-pandemic levels. The company maintains its cost advantage relative to its peers, and is positioned to continue gaining market share.
- With a significant orderbook and expansion plans, we see Wizz at the start of a significant growth story. Analysts are forecasting a growth rate of ~20%, which we consider broadly reasonable. This will allow the company to deleverage and position itself for the introduction of distributions in the year to come.
- Until then, however, the company is highly undervalued and still outperforming its peers. Its FCF yield is strong and its peers are far more expensive, representing a compelling option to gain exposure to this industry.
Company description
Wizz Air Holdings Plc (WZZAF)(WZZZY) offers passenger air transportation services on scheduled short-haul and medium-haul point-to-point routes in Europe and the Middle East. Their fleet of over 180 aircraft operates services for ~950 routes from 200 airports in ~50 countries.
Wizz’s share price performance in the last 3 years has noticeably lagged behind its peers, most of which have broadly recovered from the impact of the pandemic. This potentially represents an opportunity for investors, with many (including ourselves) seeing the airline industry as undervalued.
Financial analysis
Presented above are Wizz's half-year financial results. Note: Ratios may differ from Management data due to definitional differences to the source data above.
Wizz exceeded its pre-pandemic level in H1’23, continuing to sour beyond this level with substantial YoY growth. The entire airline industry has benefited from inflationary tailwinds, with prices in Europe increasing at double-digits as consumer demand has remained sufficiently robust to allow for expansionary price action.
In the 6m to Sep23, Wizz experienced a +24.6% increase in passengers carried, while revenue grew +39.1%. The inflation impact is illustrated below, with Revenue per Available Seat Kilometres (”RASK”) growing by +9.6%. Compounding this for Wizz is growth in its load factor, which is up 5.7ppts to 92.6%, and its fleet size, up +11.3% to 187. With the company comfortably into the 90s, we see strong demand and sufficient justification to continue its aggressive fleet expansion.
The company’s aggressive growth is translating to profitability, with economies of scale and softening cost inflation allowing Wizz to benefit from both parts. CASK (cost rather than revenue) declined by 26.5% incl. fuel and 0.8% excl. fuel. This is despite the impact of wage inflation in particular on its cost base, with fuel prices not the key as to how its profitability will develop going forward (70% hedged for FY24). On a net basis, Management defined EBITDA grew by +303.2%, with an EBITDA-M increased to 28.8% (+18.8ppts).
The profitability expansion is less clear-cut to analyze from a trajectory perspective. In the near-term, it's likely Wizz can maintain its existing levels, although we note an EBITDA-M in excess of 20% is above its historical level.
Overall, this has been a fantastic half-year for the company. It is developing exactly as we would expect, with every metric pointing to market-leading results as would be expected from a disruptor. Any belief that its growth story has derailed would be incorrect. This begs the question then as to why the company has not seen a similar share price bounce back as its fellow European peers. We believe this is likely a market mispricing.
We recently covered Ryanair (RYAAY) and easyJet (ESYJY), considering both a buy. We covered Wizz back in Apr23 where we detailed its business model and drivers of success . We will not seek to replicate that here but will touch on key factors.
Wizz’s customer growth in Europe has been incredible, with a CAGR of +28% since 2004. The company follows a similar approach to Ryanair, cutting all unnecessary costs and seeking to provide consumers with a no-frills, price-competitive offering. It has achieved this impressively, with a CASK lower than Ryanair, and half that of many of its nearest competitors.
Despite this approach, Wizz has still been able to generate impressive Ancillary revenue, implying its marketing and interaction with customers are encouraging of additional purchases. This is a quality achievement as the approach of these low-cost airlines can alienate its customer base, creating a weak relationship and one of need rather than want (needing low prices rather than “wanting” to fly with the specific airline).
Supreme execution has allowed Wizz to gain market share across the mainland and develop key bases from which to increase routes. The business has a strong focus on Central and Eastern Europe (”CEE”), where it is a market leader and benefiting from economic development and growth.
Management has not “let off the gas”, expanding its fleet size aggressively and far in excess of its peers. Consumers at this price point are not overly concerned by the brand, and so the scale benefits to its already competitive CASK have generated a compounding effect to grow load despite the seat growth.
Looking ahead, Wizz is seeking to maintain this approach, with a substantially larger orderbook relative to its peers. The question is how they will seek to utilize this fleet on an accretive/neutral basis, given the substantial delta to its peers. We are broadly confident Wizz can achieve this given its cost advantage, expansion in bases, and willingness to expand beyond Europe. The company now sees the “East” as a larger part of its future business (~25%). This comprises primarily Saudi, UAE, Turkey, Georgia, and Armenia. As these routes are unlocked (with limited competition from its European peers), the fleet will likely deliver.
Economic & External Consideration
Economic conditions in Europe have been difficult in recent years, as the global macroeconomic trend of high inflation has been compounded by war and an energy crisis. Despite this, recessions have been broadly avoided and consumer spending has remained robust.
This said, similar questions to the US are being asked, namely if consumers can bear much more given the cost of living crisis, and if a recession is likely in 2024. We suspect this is the case, which will inevitably impact consumer demand for air travel.
The key for us in rating the stock (and Ryanair and easyJet) a buy regardless, however, is that Central Banks are signaling rates may decline in 2024 and European economies are showing underlying strength. Key metrics displayed below imply a soft landing is possible, and at the very least, demand will not fall off a cliff. Inflation is below 5%, growth is broadly flat, retail sales are positive, and unemployment is reasonably low.
Outlook
Presented above is Wall Street's consensus view on the coming years.
Analysts are equally bullish on Wizz as we are, forecasting revenue growth of ~20% into FY28F and an adjusted EBITDA-M of 25.2% (above its decade average of 19%). We believe the key to the achievability of this is the ability to utilize its new planes at equal (or better) economics to currently, which means finding sufficient routes/passengers. As mentioned, we see scope for its “East” expansion, in conjunction with continued market share growth, to deliver this.
Industry analysis
Presented above is a comparison of Wizz's growth and profitability to the average of its industry, as defined by Seeking Alpha (19 companies). Note: This comparison is not perfect given airliners’ recovery are not on the same timeline, while others report on a half-year basis (such as Wizz) and so ramp-up post-pandemic will not be equally reflected .
Wizz currently underperforms its peers on a margin basis, although its growth is clearly comfortably above its peers and is expected to continue to be so. Despite the few reds above, we believe this shows a strong picture for Wizz when contextualized. Management defined EBITDA-M in its most recent half-year was 28.5%, implying a normalized level of ~20-23% is already deliverable, which is comfortably above its peer average.
From a valuation perspective, particularly when growth is layered on top, should imply a comfortable premium. This is unlikely, however, as European airliners have always traded at a discount to their US and (leading) international peers. Nevertheless, any discount to parity is value in our view.
Valuation
Wizz is currently trading at 5x NTM EBITDA and 8x NTM PE. This is a discount to its historical average. We will focus our analysis on NTM indicators given the growth HoH.
A discount to its historical average is unwarranted in our view, owing to Wizz maintaining its trajectory despite the pandemic, a broadly undamaged balance sheet, and continued execution toward its long-term growth objectives. At an EBITDA-M discount of ~40%, we believe Wizz is significantly undervalued.
Further, Wizz is trading at a 69% NTM P/E discount to its peers, despite the potential for market-leading margins and superior growth. We assign this to market mispricing. Markets are overlooking the company, and likely taking a negative view of its lack of distributions and potential for competition against Ryanair. We see the former as a non-issue, as once capex slows alongside deleveraging at the end of the decade, distribution potential will significantly increase. The latter has already shown itself to be a non-issue, with both co-existing successfully.
Key risks with our thesis
The risks to our current thesis are:
- Significant demand-led downturn across Europe.
- Price-led competition spiral contributing to margin tightening.
- The company’s balance sheet is fairly levered, which could be problematic if its high margins are not sustainable.
- GTF engine inspections contributing to material impact on revenue generation due to groundings (not occurred thus far according to Management).
Final thoughts
Wizz has the potential to have explosive growth in the coming years. The company’s fleet is due to grow significantly, it is highly profitable, and its ability to gain market share implies a highly competitive offering. Its recent quarter was highly impressive, particularly with EBITDA-M exceeding 25%.
We do see risks with Wizz but its valuation almost wholly offsets any concerns. The company is trading at a FCF yield in excess of 20% and a deep discount to its peers and historical average.
For these reasons, we are upgrading our rating to buy.
For further details see:
Wizz Air: Potential To Disrupt The Airline Industry With Market Share Growth (Rating Upgrade)