The US election is over. Trump is in. The world hasn’t ended. Let’s get back to business with a look at results recently from Wizz Air (WIZZ) and Michael Kors (KORS).
Firstly, let’s look at the good. Recently Wizz Air announced their H1 results, incorporating record first half profits and margin expansion:
- Passengers carried up 17.4%
- Revenue up 10.1%
- Profit before tax up 37.5%
- Profit after tax up 12.5%
- After tax margin up 0.5%
The company have continued their relentless drive to provide a more efficient business in order to drive shareholder value. At the same time, they are maintaining expansion plans to ensure they remain the number one carrier in Central and Eastern Europe.
So what do I like from this report, other than the figures?
- Firstly, Wizz Air are excellent generators of free cash flow, generating another 100m+ in FCF to date this year. I always focus on free cash flow generative companies as this gives a cushion and some “margin of safety” to the company.
- The company continue to increase passengers carried (+17.4%), as well as expanding their operating capacity within Europe. Consolidating their top three position in the countries in which they operate, they are also maintaining their expansion drive.
- Aircraft average age is 4.3 years, “one of the youngest fleets of any major European airline”.
- Over €800m in cash, against a market cap of €1.1bn.
And the negatives:
- Passengers carried may have been up, however individual passenger revenue was down 6.8% overall.
- Flight punctuality was down to 78.4% from 85% a year ago. Something to keep an eye on.
All told, I remain more than happy to hold based on these results. When first looking at this company I compared them to two other big UK-listed players Ryanair and EasyJet. How do their valuations compare?
In truth, I’d be happy to be invested in all three of these businesses. All are trading on reasonable valuations, although Ryanair could be said to be more expensive based on price to book, price to earnings and price to sales metrics.
But there are many promising developments ahead for Wizz Air, holding a commanding market share in Central and Eastern Europe.
Following up now with Q2 results from Michael Kors.
- Total revenues declined 3.7%
- Americas revenue decreased 11.1%
- Europe revenue increased 1.9%
- Asia revenue increased 96.5%
A mixed bag on results. The Americas represent nearly three quarters of all revenue generated by the company, therefore having a significant impact upon total revenues. Whilst expansion into Asia is clearly proving successful, this still represents less than ten per cent of revenues.
One interesting point I noted from the report was that retail sales actually increased in the Americas in this quarter. The overall decline was due to lower sales in their wholesale operation. KORS appear to recognise the significance of their retail operation, noted by the increase in retail stores (8) and decrease in wholesale outlets (-142). This is a trend that began prior to this quarters’ results.
In May, the company paid $500m to acquire 100% of the previously licensed operations in Hong Kong, with a view to amalgamating it into their core business. For the five months ended October 1st, this operation generated $72m in revenues, but was loss making to the tune of $6m. Whilst sales in the Asia region continue to pick up speed, it will be necessary to cast a keen eye over future reports to ensure this purchase was prudent.
One point that stuck out for me was the near 20% of this $500m being marked down as “goodwill”. This is a significant sum and marks a heady premium to the estimated valuation of the business. Goodwill exists only to help ensure a balance sheet remains balanced. (For more information on this I recommend a Google talk by Professor Aswath Damodaran. Click here to watch).
I remain bullish on Michael Kors. Having been a previous shareholder of Burberry (BRBY) I remain confident of their ability to capitalise on the growing middle class in the Asia region. Having undertaken discounted cash flow forecasts on a number of “premium” retailers I feel as a whole they are undervalued. Hugo Boss, Dior, Luis Vuitton, Burberry. All undervalued and companies I would potentially be looking to invest in in the future. Of the lot, I still believe KORS has the greatest discount to intrinsic value.
Disclosure: Wizz Air and Michael Kors are constituents of the portfolio.