Wizz Air faces turbulent times and SSP engages in financial gymnastics

“There is a definite tailwind behind stocks and market optimism remains high despite various geopolitical tensions in the US and Asia,” says Russ Mould, Investment Director at AJ Bell.

“China reported positive data with its services sector returning to growth last month for the first time since January. Investors took this as a positive sign that the country was slowly getting back on its feet after the pandemic.

“The FTSE 100 continued to tick higher, rising another 1% to 6,281 thanks to ongoing strength in oil producers Royal Dutch Shell and BP. Also adding support to the index were insurers and banks.

“In Japan, the Nikkei’s rally put the index a mere 6% below its year-to-date high. The top risers on Wednesday were car makers Mazda, up 9%, and Nissan, up 7.5%."

Wizz Air

“Under normal circumstances, Wizz Air’s full-year results would have been cause for celebration with record profits. Sadly, these numbers mostly relate to the pre-coronavirus world and so aren’t a true reflection of the business today.

“Wizz Air has been relatively upbeat throughout the pandemic, implying that its strong balance sheet would give it an advantage over many financially weaker rivals and put it in a position to increase market share post-crisis.

“Last week it announced expansion plans with four new bases in places including Italy and Cyprus and the launch of 50 new routes. Having established a strong position across large parts of Europe, it is pressing ahead with plans to launch operations in Abu Dhabi as part of a strategy to expand across the Middle East, Africa and the Indian subcontinent.

“Maintaining growth plans may well serve the business well in the long term, it just needs to get through the short term without any major damage to earnings which is going to be hard.

“It makes 45% of revenue from ancillary sales which are the extra costs to the customer on top of ticket prices such as baggage fees and food and drink during a flight. This is going to be vulnerable area for the business as a result of restrictions on how people will fly.

“Airlines are likely to stop serving food and drink on flights where possible as part of coronavirus safety measures.

“The European Union Aviation Safety Agency, the EU’s air safety body, recommends cutting down on cabin bags to speed up boarding and reduce contamination risk. Airlines are being encouraged to incentivise customers to do this, so companies like Wizz Air may have to cut charges to put bags in the hold, thus lowering an important source of income.

“The other issue for Wizz Air is going to be strong competition for flights once lockdown restrictions are properly lifted. There is likely to be a period where airlines slash ticket prices to fill planes as much as possible.

“It’s no wonder that Wizz Air is not providing guidance on earnings for its new financial year as there is so much uncertainty over how and when the travel sector will recover.”

SSP

“The share placing announced by travel food and drink concessions operator SSP feels like an act of financial gymnastics.

“The company clearly felt obligated to pay a final dividend which had been approved at the AGM back in February but also wants to conserve cash at a time when much of its business has been wiped out by coronavirus.

“That explains the give with one hand, take away with the other nature of today’s update as the company effectively asks shareholders who are eligible for the dividend, which is to be paid after a delay on 4 June, to reinvest or give the cash back to the business. This ‘offer’ is being extended to retail investors too.

“A bird in the hand is worth two in the bush and it will be interesting to see how many of SSP investors choose to hold on to the cash rather than funnelling it back into a business which faces acute challenges due to the pandemic.

“Just how acute those challenges are is evident in the first half loss reported today, despite the fact only one month out of the six was really affected by the lockdown.

“The company was never going to be able to react quickly enough on costs to an overnight change brought about by travel restrictions.

“For all its talk of emerging a fitter, stronger business at the end of the crisis, at present sales are running 95% lower year-on-year so it is all about survival for the time being.”

These articles are for information purposes only and are not a personal recommendation or advice.


The daily market update is written by Russ Mould, AJ Bell’s Investment Director and his team. The article highlights the movement in the main index, winners and losers on the day and any macro-economic announcements.