The travails of the airline sector are enough to make most investors assume the brace position for a hard landing. Brexit and the implications for flight paths and cross-border customs checks; fluctuating fuel costs; a rising wage bill thanks to militant pilots; exposure to the downturn in consumer confidence; and sending planes up into skies that are overcrowded with the jets of other operators.
An increasingly busy part in this turbulence is being played by Wizz Air, the budget airline that specialises in flights to and from central and eastern Europe. Based in Hungary, Wizz Air was founded in 2003 and carried passengers on its first flight a year later from Katowice, Poland. It flies more than 600 routes from 25 bases across Europe and employs more than 3,000 people.
After one false start the company listed on the stock market in February 2015 and its quotation and position in the FTSE 250 midcap index values it at £2.6 billion.
At least part of the thinking behind its geographical specialism was that Wizz Air would capitalise on the expanding economies of central and eastern Europe, where a growing and more affluent population would travel more on internal flights as well as across borders. It was also the case when Wizz Air began that its main rivals, Easyjet and Ryanair, were showing less interest in the region and, even now, their flights to and from its main markets are less frequent.
So let’s take some of the issues. Brexit, given the business model, might be less of a worry for Wizz Air than for its competitors but it is problematic because the carrier flies from multiple locations in the UK, including Luton, Southend and Cardiff. In this, Wizz Air has done all that it can in an environment that is intensely unpredictable. Last year it established an operating company in the UK, with a licence from the Civil Aviation Authority and permissions from the transport secretary that should mean it can continue to run services in and out of Britain after Brexit. The word “should” is required as there may yet be a hard exit and, if that happens, the precise status of air travel remains unclear.
Like all airlines, the company takes out hedges against increases in fuel prices, its largest cost ahead of airport and handling charges. In an update to investors last month, Wizz Air said it had used low prices over the summer to increase its hedging positions, such that 77 per cent of its expected fuel usage for next year and 43 per cent for 2021 was protected. Hedging rarely insulates airlines entirely, however, and the carrier’s fuel costs over the 12 months to the end of March rose by 39 per cent to just under €668 million.
No amount of financial engineering can protect a carrier from airport disruptions and the difficulties of the market, and at the end of May Wizz Air reduced its profit expectations for the financial year to between €320 million and €350 million, against analysts’ previous hopes of €363 million.
In many ways this airline is performing impressively: passenger numbers and revenues are rising at double-digit percentages, and its young and growing fleet of planes is running at ever higher levels of efficiency. It is not buying assets from collapsed airlines, although it looks at whether available landing slots might be attractive.
Wizz Air pays no dividend, preferring to reinvest profits into supporting growth, which might irk some investors. The shares, down 21p or 0.6 per cent to £36.04 yesterday, do not trade at distressed levels like some of its peers, carrying a multiple of 14.9 times forecast earnings. Given the uncertainty, that means they are probably reasonably valued.
ADVICE Hold
WHY Rapidly growing, efficient on costs, but shares not a bargain in the uncertain market environment
Hargreaves Lansdown
The Woodford affair is not over by a long chalk (Patrick Hosking writes). Perhaps half a million investors remain trapped in the frozen Equity Income fund. The Patient Capital investment trust is a joke. Regulators continue to probe the whole rotten saga.
But Hargreaves Lansdown, so far at least, has weathered it well. Britain’s dominant investment platform risked being tarnished by Woodford, not just because it recommended its funds but because it invested client money in Woodford through its in-house funds.
A net new 35,000 client wins in the three months to September, plus a net additional £1.7 billion of inflows suggest clients don’t blame Hargreaves, or at least not enough to withdraw their money. Net revenues were up by 6 per cent thanks to improving markets in the quarter.
The numbers aren’t quite as rosy as they look: £900 million of that new business came from transfers of low-margin business from JP Morgan and Baillie Gifford.
Even so, the company remains a formidable force. Yes, it is undeniably expensive, but the affluent classes are more than happy to pay that price for someone who answers the phone and an intelligent help desk.
Competition is intensifying, however. The whole investment industry is under pricing pressure and, according to a major piece of research by Liberum, the platforms sector is set to be squeezed the most. On the other hand, platforms enjoy a natural tailwind: so long as markets go up, they can do nothing and still see their revenues rise.
Hargreaves looks well placed. It has the scale to drive down costs per customer. It has the advantage of in-house techology, enabling it to react quicker to regulatory or market changes. It’s a trusted brand and is quietly innovative too, such as with its new savings product. The 2.7 per cent slide in the share price yesterday to £17.67 leaves it on a multiple of 34 times full-year earnings. Expensive, but not as expensive as it has been. An expected dividend of 42p this year gives it a yield of 2.4 per cent. On a discounted cash valuation, Liberum reckons the company is worth £21.25 per share even assuming relatively pedestrian revenue growth in future.
ADVICE Buy
WHY Dominant market position, customer-friendly
