Wizz Air
Wizz Air disappointed the market last week with a Net Income figure of £342m, about 25% lower than Bloomberg consensus. This was primarily due to costs increasing faster than expected. Management also provided more detail on the required grounding of aircraft next year, necessary for Pratt & Whitney to carry out unscheduled checks of the GTF family of engines. The company disclosed that they had reached a compensation deal with Pratt & Whitney, though there were very few details about the size of this deal for reasons of confidentiality.
Our system meanwhile, picked up on an unusually large increase in the DSO figure. Looking into the trade receivable note (below) revealed some interesting detail around the balance.
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 clues as to what this line item might include, we looked back at the annual report (disclosure below).
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.
