Wizz Air (Ticker: WZZAF) – Cleared for Takeoff?

  • Favorable demographic tailwinds in Central and Eastern Europe should continue to drive demand for greater airline capacity.
  • Regional incumbents are less-efficient nationally supported efforts with unions and all the other sundry legacy costs which tend to make them weak competitors.
  • Steady or lower fuel prices will only further goose the bottom line of this profitable ULCC supported by Indigo.
  • The stock is still an attractive GARP with a EV/EBITDA of 6x, EV/Sales of 0.9x, PEG under 0.8, and decent FCF yield.

Wizz Air is the largest low-cost airline in Central and Eastern Europe and one of Europe’s leading ultra-low-cost airlines. Wizz Air operates one of the youngest aircraft fleets in the world with its Airbus A320 and A321s. The company was named 2016 Value Airline of the Year by the editors of Air Transport World, one of the leading airline trade magazines. I believe the stock is undervalued for its growth profile.

The company still has sizable market share opportunities ahead of it across Eastern Europe and yet it trades as though it isn’t growing at all. Many of the traditional Central and Eastern European (CEE) airlines are less-efficient nationally supported efforts with unions and all the other sundry legacy costs which tend to make them weak competitors. We saw this happen with ULCCs in Western Europe a decade ago, and a similar story could play out again.

travelmap

By contrast Wizz is a an ultra low-cost carrier (ULCC) similar to SPIRIT or JetBlue. Consequently Wizz and Ryanair are both share-takers, growing at double-digit rates in the CEE. The stock is a growth at a reasonable price (GARP) play at a very reasonable price.

Indigogo, a well-respected private equity firm, first invested in WIZZ in 2004 and recently sold its 18.7% position in an accelerated private placement. This is mildly concerning, but it sounds like Indigogo is simply interested in setting up more ULCC’s in new markets such as Chile. After accounting for outstanding notes and convertibles Indigogo still owns the equivalent of 24.2m shares, or put another way they only liquidated ~30% of their WIZZ holdings. Furthermore, Indigogo has a good record of successful ULCC stocks after they have exited, see RYAN, Tiger Airways, and SAVE.

The founder and CEO owns roughly 4% of shares, and seems focused on the right things. Here’s a short profile. Wizz currently operates a mixed fleet of 85 1-5 year old A320s and A321s, a very new and fuel-efficient fleet. WZZAF therefore enjoys very low CASKS, on par with RYAN.

It’s my personal belief that fracking tech combined with strong gas and renewable competition is going to continue to drive oil prices lower or at least keep them level. Such an environment should be favorable to airlines and passenger growth. Additionally, WZZAF benefits from OK demographic and economic trends across the CEE. These are under-penetrated markets with about 0.5 seats per capita vs 1.6 in Western Europe per Capstats. I am assuming that ULCC is an attractive model for the CEE region due to the growing middle classes in these countries. Basic monthly traffic stats are posted by Wizz Air here.

The company has a high degree of operating leverage which is working in its favor currently, but could hurt at some point. Additionally, financial leverage is high due to capitalized leases, though that formula will change a bit with upcoming outright aircraft purchases. The firm has solid margins and appears to match up well with RYAN operationally. This stock could double in the next couple of years if capacity continues to grow at the current rate. Overall I like the setup and the underlying tailwinds. I don’t know that WIZZ can really match RYAN head-to-head but it doesn’t have to given the large market opportunity available from legacy carriers.

Wizz Air is listed on the London Stock Exchange under the ticker WIZZ.L and is included in the FTSE 250 and FTSE All-Share Indices. U.S. shareholders can obtain Wizz shares via the OTC PLC ticker WZZAF.

Risks

  • Russian military exercises in the coming weeks could result in a slowdown in business.
  • Overcapacity due to aggressive competition with Ryanair. Indigo converting or selling its remaining stake within the next year would be the tell and should set off some alarm bells about the competitive environment were they to completely exit.
  • Fuel prices rise significantly above current levels.
  • A decline in CEE demographic and economic growth trends would slow down growth.
  • Brexit and the other European political concerns.
  • Strengthening USD would hurt the stock.

 

 

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Author: secondhandstocks

The genesis for this blog stems from a Marine buddy and I came back from Afghanistan with more money than knowledge, and heedlessly tossed our hats into the stock market ring. A few months later, I remember discovering the classic book The Intelligent Investor by Graham and Dodd, and ravenously devouring my first introduction to value investing. That framework - with some generous additions by Seth Klarman, and Joel Greenblatt among others - guides my investment philosophy. I spent five years working in the intelligence field, both in the Marine Corps and then for a government agency after that. I speak Arabic and Pashto, have programming and analysis experience, and enjoy investing in technology companies as a hobby. I also spent a year on Wall Street working on a #1 Ranked Institutional Investor team, before deciding that that the Sell-Side was not for me.

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