Description
(To VIC Administrators - there is no option for Austria under the 'Country' dropdown menu. Can you please fix this? Symbol FLU AV. Thanks)
Flughafen Wien AG (Symbol: FLU AV) – Long
Market Cap: ~€2.2b (Last Sale: €25.90/sh)
TEV: ~€2.6b (~€400mm Net Debt)
30 Day Avg Daily Volume: ~25k shares/day (~€650k)
Investment Horizon: ~24-36 months
Summary
Without discrimination, airport operators have been caught directly in the crosshairs of the COVID-19 economic and health crisis. Airport traffic levels have tumbled (in some instances >95% yoy in April to date) and, like other travel/leisure related businesses, the airports have begun cutting 2020 dividends, raising capital, laying off staff, etc. While the industry is clearly not out of the woods, airport stocks are generally down 30%-50% ytd; we believe this drawdown offers opportunities to establish long term positions in several of these high-quality transport infrastructure companies.
In particular, a name we like is Flughafen Wien (FLU) given a strong credit profile, adequate liquidity, and a decent medium-term growth trajectory. Trading at ~6.5x 2019 EV/EBITDA we believe the valuation is cheap for a business of relatively high quality. While 2020 is clearly disastrous and 2021 likely won’t be very good, we believe the stock will begin to reflect ‘normalized’ conditions long before traffic fully recovers. With that, assuming the stock trades back to its 5-year average multiple (~9x EV/EBITDA) we see a reasonable path to a 20%-25% IRR over the next 2-3 years.
Business Overview
FLU is made up of three international airports in Austria (Vienna), Malta and Slovakia (Košice1), and the Bad Vöslau airfield. More than 85% of revenue is derived from Vienna.
- Vienna Airport is Austria's largest airport and serves as the hub for Austrian Airlines and Lufthansa as well as a base for low-cost carriers easyJet Europe, Lauda, Level and Wizz Air.
- Malta – FLU holds a 65-year concession to operate Malta Airport from July 2002.
- Košice Airport is the second largest Slovakian airport and despite difficult general conditions has a posted steady upturn in passenger figures over the last few years.
- Bad Vöslau Airfield is a local airport and primarily serves private aviation.
Only ~10% of the shares trade in the free float, which admittedly isn’t optimal. The main shareholders are:
- 40% - Airports Group Europe (an indirect subsidiary of IFM Global Infrastructure Fund)
- 20% - Province of Lower Austria
- 20% - City of Vienna
- 10% - Private employee participation foundation
Summary Thesis
- Like most other major airports, FLU benefits from high barriers to entry as Vienna Airport holds an effective monopoly on international travel around the Vienna region.
- FLU’s credit profile is strong and they are highly likely to make it to the other side of this mess well intact.
o Their balance sheet is in great shape – FLU is levered ~1x net debt / ttm EBITDA (or ~2x where ’20 consensus EBITDA stands today), which is generally much lower than peers.
o And, estimated liquidity of ~€350mm seems adequate (at least as it looks today), covering ~75% of 2019’s total operating costs. FLU commented on liquidity in mid-April saying they had adequate liquidity to year end even should current conditions be maintained (i.e. Vienna Aiport traffic down 98%).
o Even with EBITDA down >50% this year FLU will likely generate positive free cash flow thanks to actions the company is taking.
o And, governments (Austria and the City of Vienna) own 40% of the equity – Vienna Airport is of great strategic value and it is difficult to believe these governments would not ultimately bail it out should a worst-case scenario develop (though likely this would come with some equity dilution).
- The near term is obviously very challenging and visibility is low.
o Consensus is gravitating toward calling FLU traffic down ~40% yoy in 2020, followed by a sharp increase in 2021. While I think this is directionally the right view, estimating 2020/21 revenue with much precision is a guessing game right now.
- FLU is set to report in mid-May though has already announced several actions to reduce costs and preserve cash:
o Cutting €220mm in annualized costs
o Reducing capex to <€100mm
o Will not be paying their planned 2019 dividend
- In normal times, FLU is a steady grower and recorded positive sales growth in each year last decade. Looking beyond the current crisis there is no reason growth shouldn’t achieve similar levels.
o Sales grew 5.6% per annum last decade. This growth was achieved mainly through organic initiatives.
- FLU has embarked on several growth projects and initiatives that should help bolster revenue growth rates over the medium term. To highlight:
o A new real estate (Office Park 4) complex, comprising around 26,000 m² of floor space that is slated to be ready for occupancy by mid-2020 – this timeline remains intact.
o FLU began the process of constructing a new hotel, which has been scheduled to open its doors in 2021 (though this timeline is probably pushed back).
o Modernization and redesign of Terminal 2 and the Plaza will help the airport to grow retail revenues per passenger over the next 5 years.
o And, FLU has been preparing for the buildout of a third runway at Vienna Airport.
- Valuation
o At the last sale FLU trades at ~6.5x 2019 EV/EBITDA, and ~14x 2020 EV/EBITDA.
o Over the last 5 years the average EV/EBITDA multiple the stock has traded at is 9.1x.
o As conditions bottom and begin to rebound we expect FLU to rerate to a ‘normalized’ valuation (meaning average historical multiples on 2018/19 earnings).
o Overall, we see a path to a high €30/sh stock price in 2-3 years – including dividends (to be resumed in 2021) this would represent a 20%-25% IRR.
Key Risks
- Air traffic remains depressed for several years. While this would be unprecedented, the current environment is also unprecedented.
- Airline bankruptcies and related operational issues. In particular, Lufthansa is an important airline for FLU (see chart at bottom depicting airline exposure).
- Bankruptcies from retailers who have a presence at Vienna Airport.
- Increased interest rates as airports are typically valued via DCF.
- Trading illiquidity – FLU trades ~€650k a day, so can trade volatilely, and is also likely no suitable for many institutional investors.
- Regulatory risk.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
- rebound in air traffic levels
- resumption of dividend