WFS – Q3 20 results and call points to continued improvement
All,
Please refer to our updated analysis here.
The Q3 20 results confirm the recovery momentum in both segments, as explained below. EBITDA was in line with our estimates despite weaker than expected revenues, which shows decent cost control. We also see a number of encouraging early trends in both air cargo and ground handling, which should support the bonds going forward. Therefore, we are no longer considering WFS from a short perspective.
Air cargo: yoy volume declines are now down to only -4% in October and -3% in November. We estimate that air freight rates have risen so much that even unconverted passenger planes are now flying empty of passenger and with its belly compartment full of cargo. This solves the equation of the divergence between cargo and passenger volumes in the sector. It opens a narrow path for WFS to ride the goods vs. services divergence that opened up in the global economy due to covid, similarly to CMA CGM.
Ground handling: yoy volume declines also down to “only” -49% in Oct/Nov, from 60-70% previously. This is due to a pickup in domestic flights in certain large countries, especially the US. This does suggest light at the end of the tunnel, especially once we are over the second wave of European lockdowns, possibly around early to mid-December.
Liquidity: The EUR177m liquidity cushion in October, though diminished from Q2 and Q3 levels, remain enough to cover the company’s needs for the next 2-3 quarters. The deferrals of payables are expected to reverse mostly in 2021. And with activity already picking up, working capital requirements are likely to increase only gradually. This leaves WFS in no rush to finalize its capital structure review.
Refinancing with a high coupon? WFS’s 6.75% bonds are now trading at 91, effectively back to pre-covid levels, with a yield of 11%. This yield puts WFS on the edge of the high-coupon refinancing group. PureGym has recently issued at a yield of 6.88%. Carnival came at 7.625%, following a 10% deal in August, just to mention a few cases from heavily covid-impacted companies. A plain vanilla refinancing could become achievable on continued positive momentum in the High Yield market and in the airport services sector, in an environment of investor optimism due to the widespread air distribution of covid vaccines.
We currently find it difficult to see WFS returning to FCF generation after interest, unless the business has a credible path to improve beyond the pre covid (ie 2019) levels on EBITDA. However, with the rotation away from “covid defensive” towards “covid cyclical” credits now firmly on the way, more bullish investors could chase the bonds over the line.
Feel free to reach out if you would like to exchange ideas on the name.
Juliano
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