It is not just passengers stuck at Britain’s airports who are finding it more difficult to get on board with Wizz Air. Shares in the budget airline are in a more rapid descent than rivals Ryanair or easyJet, undoing the pandemic-era outperformance.
The pink-bannered airline is grappling with lingering coronavirus travel restrictions and rampant inflation that has pushed up fuel costs, while the outlook for demand from squeezed consumers is far less certain. You can now add travel chaos at British airports, caused by staff shortages, which has just prompted Wizz to suspend operations at one of its UK bases.
Wizz has no intention of making life any easier for itself. The airline is investing heavily in expanding westwards beyond its eastern European roots, with plans to increase the size of its fleet and to take market share from competitors whose wings have been clipped by the financial drain of planes being grounded during the past two years.
The airline is aiming to grow the fleet size from 153 aircraft at the end of March to 182 by the same point next year and 500 by the end of this decade. The broader economic fallout caused by the war in Ukraine and failure of passengers to fully return to pre-Covid levels have curtailed none of those plans, according to Wizz Air founder and chief executive Jozsef Varadi.
Investor caution is growing, and required. An enterprise value of nine times forecast adjusted profits before tax and other charges this year might have come down from a peak of almost 15, last touched during the summer of last year, but it is still more optimistic than at any point prior to the pandemic.
Passenger numbers are still far short of pre-Covid levels, almost a third lower. Empty seats are costly, explaining last year’s €643 million loss. The load factor, the percentage of available seating capacity filled with passengers, was 78.1 per cent compared with almost 94 per cent over the 12 months to March 2020.
Varadi has a punchy ambition of flying 60 million passengers this year, 20 million more than pre-pandemic. How? Expanding capacity in western European airports and to the east of the continent, as well as via its core eastern European routes. On bookings since the end of March, average fares are up by low single digits against pre-pandemic levels.
But filling a far greater number of seats while managing to maintain pricing may become harder. In western airports, which also carry higher operating costs, it is up against dominant players, such as Ryanair. Higher fuel prices could force Wizz’s hand in passing on the heavier cost burden through to passengers sooner than rivals, reckons the Irish brokerage Davy. Wizz has hedged its exposure to fluctuating jet fuel prices to a lesser extent than rivals, roughly 30 per cent until August. The plan now is to hedge more of that and for longer.
Wizz has attributes that helped it through the pandemic: a bias towards short-haul routes, a low-cost operating model with bases primarily in eastern Europe and a lower degree of leverage. A balance sheet under far less strain from debt has laid the grounds for expansion. But the cost of growing the fleet has eroded cash balances, which declined by almost a third last year despite some recovery in passenger numbers.
The load factor will recover to 90 per cent during the second quarter, management reckons. But Wizz’s ability to fill a lot more seats without being drawn into a pricing war with rival budget carriers, while also navigating staff shortages and disruptions at some airports, means there is still plenty of potential for profits to disappoint this year. That uncertainty is not reflected in the share price.
ADVICE Avoid
WHY The stock’s valuation does not reflect the inflationary and demand challenges facing Wizz
Picton Property Inciome
Investing in industrial property doesn’t come cheap, but Picton Property Income is a rare bargain. The real estate investment trust has 60 per cent of its assets invested in the warehouses and distribution facilities, primarily in the space-strapped southeast, which have inspired a once unlikely clamour among institutional investors.
A heavy weighting to the sector can be attributed to rapid valuation gains, which last year rose 34 per cent on an underlying basis and turbocharged the Reit’s net asset value up by about a quarter.
Yet shares in the Reit trade at a discount of almost a fifth to the NAV recorded at the end of March. Why the cynicism? Returns are likely to weaken this year, according to Lena Wilson, Picton’s chairwoman. That’s unsurprising. Pandemic polarisation in investor sentiment resulted in a flight to the perceived safety of industrial property and a speedier descent in high street and shopping centre property values. Picton was in the right place entering the tumult, evidenced by a 24 per cent total property return for the 12 months to the end of March, ahead of the 19.6 per cent delivered by the MSCI UK Quarterly Property Index. There are no plans from management to boost the trust’s exposure to what has become a pricey industrial sector.
Last year’s returns were from a lower base too, and a weaker economic outlook threatens to curtail tenants’ ability to pay higher rents. Inflation is a risk and Picton doesn’t have the same degree of explicit inflation linkage in its leases that some other reits do. Conversely, a major refinancing this year fixed the company’s cost of debt until 2031, insulating it against the impact of rising interest rates.
A look at Picton’s track record might prompt investors to cut it some slack. A history of outperforming the wider real estate market stretches back nine years, pre-dating the market’s love affair with warehouse property, when offices were in vogue. There is also a dividend fully covered by earnings to draw investors in, which is forecast to total 3.73p a share this year, representing a potential yield of 3.8 per cent. Embedding some discount into the share price is justified, but that looks overdone.
ADVICE Buy
WHYThe discount attached to the shares looks too steep
