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Shares in Wizz Air dropped nearly 10 per cent last Thursday, which is quite a bit although they’ve largely bounced back since.
Investors were spooked by the Hungarian airline’s announcement that several of its planes would temporarily not be doing plane things:
Based on a service bulletin in relation to GTF engine inspections (issued 3 November, 2023), and verification performed with Pratt & Whitney, we are projecting a grounding of 45 aircraft by the end of F24 (including aircraft previously grounded in September ‘23 and from mid-January ‘24). Overall impact to ASK capacity for H2 F24 expected to be c. 20 per cent higher YoY (Q3 c. 25 per cent, Q4 c. 15 per cent). Near and longer-term operational and financial impact is mitigated by management actions and OEM compensation that has now been secured.
As mainFT reported:
József Váradi, chief executive, said the company expected to be compensated by the engine maker for its direct financial losses, but was facing an “unprecedented operational challenge” that could last 18 months as the engines are removed for inspections amid concerns over contaminants in the powdered metal used to make the turbofan engines.
The company has declined to say how much compensation it expects to receive, but a note by research group Forensic Alpha that caught Alphaville’s eye offers a clue.
Here’s what they’re looking at:
FR says (their emphasis):
We’d like to focus here on the balance of “Prepayments, deferred expenses and accrued income” which is a now a sizeable €284m, and is larger than the “trade receivables” balance. For context this line item has historically been much lower (In H1 22 the balance here was €100m)
A footnote below the table states that prepayments to vendors amounting to €64m were reclassified from trade receivables to this line, requiring restatement of the FY figure. This partly explains the large size of the balance, though it does raise questions about the quality of the accounts preparation.
After factoring in the reclassification, we can see the line item has still grown by over €100m in just the last 6 months.
For the purposes of comparison, FTAV pulled the historic figures for this item. The pop in the latest accounts is pretty chunky:
What falls into this category? As FR flags, the annual report offers some clues:
They write:
Based on this, we think it’s likely that the increase in this balance at least partly reflects compensation from the Pratt & Whitney deal being recognised in the income statement. This could have provided a much-needed boost to net income. Management already raised the fact that they had recognised a ‘small’ amount of compensation in the income statement, without elaborating further. The movement in this balance of over €100m provides some further clues as to the quantum involved (although of course investors should note this is mixed together with prepayments and deferred expenses).
There are also consequences for the cash flow of Wizzair, since growth in accrued income is one of the factors holding back cash conversion in H1 (We calculate operating cash conversion of 83% in H1). Wizzair rightly speak of strong cash generation in H1, but arguably it should have been stronger given that the company operate with negative working capital (a company with negative working capital should theoretically achieve conversion of over 100% as it grows) Investors should also note that H1 is historically much stronger for cash flow generation than H2. Added to this, if growth stabilizes or slows into H2, negative working capital will cease to be a tailwind. We have little information on the timing of potential compensation from Pratt & Whitney, but as we enter into H2 it looks like there are an increasing number of reasons for investors to be nervous about the balance sheet.
So there you go, some mildly interesting additional information. Don’t say we oversold this.
Further reading
— When Wizz Air wrecked the immigration stats (FT Magazine)
Read the full article here