Flughafen Zurich AG (FHZN:SWX) share : Analysis

Flughafen Zurich shares are traded on the Swiss stock exchange SWX. The company operates Zurich-Kloten Airport, the largest in Switzerland. This analysis follows the one written by dividinde in 2018. A lot of water has flowed under the bridge since then. We obviously think of the chinese virus, but we will see that difficulties have already appeared for the airport in 2019.

Difficulties in valuing Flughfen Zurich shares

With Corona, any attempt at valuation must be taken with a grain of salt. The sharp drop in corporate revenues and profits this year has taken us into another dimension. This is all the more true for a company like Flughafen Zurich, which is being hit hard by the lockdown measures. FHZN's price/earnings ratio compared to the 2019 financial year is very attractive, at just 13.65. Even if we take into account the figures for the last five years, it stands at 16.74. However, let's look at the 12-month rolling (TTM) ratios provided by financial sites. Flughafen Zurich's PER has climbed to over 30, due to the losses already announced in the first half of 2020. It is difficult to know how long this "mess" will last. It is therefore also difficult to completely ignore the figures already announced this year.

Other approaches to valuing Flughafen Zurich shares

One thing that works well in this kind of situation is to base your decision not on results, but on assets. From this point of view, FZHN is not particularly attractive, since it is trading at two times book value and 1.7 times tangible assets. On the other hand, even if we only look at the 2019 figures, the stock was already trading at 3.5 times revenue, which is huge. Remember that a ratio above three is generally more of a sell signal.

Another area of concern: free cash flow. In 2019, before the Chinese virus, it was already negative. It is therefore impossible to value FHZN from this point of view that year. If we take the average FCF of the last five years, we obtain a ratio of 20. Worse, if we calculate it in relation to the enterprise value, the indicator climbs to more than 25, due to a fairly high net debt.

Flughafen Zurich was already too expensive before Mr Covid, so it is even more so today.

Flughafen Zurich share dividend

Like many other companies, Flugfen Zurich had to suspend its 2019 dividend, which was paid in 2020. Companies that offer increasing distributions are generally preferred, as was the case for this company. However, it must be admitted that this is a wise decision in this exceptional situation. That said, those who had acquired FHZN solely for its dividend were very unhappy. Neither the planned ordinary dividend of CHF 3.90 per share nor the announced additional dividend of CHF 3.20 per share were paid. This reminds us once again that shares are not bonds. The company can decide at any time to lower or cut its dividend. History shows us that this happens more often than we think, even in large and solid organizations.

Result

While sales and profits had been growing steadily in recent years, the first half of 2020 saw revenue halved, triggering a loss of 28 million. Cash reserves had also already started to melt away since 2017. FHZN has clearly been struggling to create value for its shareholders for some time, even before the Covid manic-depressive episode. This is reflected in a share price that has lost 40% over the last three years.

Liquidity

In terms of liquidity, it's not really a party, since the current ratio is only 0.67 (a sharp decline) and the quick ratio is 0.65. In the first half of 2020, Flughafen Zurich nevertheless paradoxically managed to replenish its cash reserve. Obviously the money didn't fall out of nowhere, it was necessary to increase long-term debt by more than 700 million. At least that allows the bills to be paid for a while...

Profitability and profitability

So far, it must be acknowledged that there have been few qualities to be found in FHZN. However, they do indeed exist. First of all, the gross margin is enormous, with 86% (up). Even the net margin is impressive, with 25.5%. This is paradoxical because from this point of view, we have the impression of being in the presence of a cash cow, even though liquidity is lacking. This is explained by the asymmetrical evolution between profit and cash flow in recent years, which is often a bad signal. Let us recall that in 2019 the FCF is negative even though the net margin is remarkable. As for profitability, it is also appreciable, with an ROA of 6.73% (up), a CFROA even higher, at 11.15% and an ROE of 12.52%.

Debt

Even though Flughafen Zurich's debt is "only" 0.54 times its equity, it would take the company more than six years to fully amortize it using its free cash flow. That's a lot, and it can be explained by the difficulty Zurich airport has in converting its profits into hard cash.

Shareholder return on Flughafen Zurich shares

It should also be noted that the use of debt has represented a negative return for the shareholder in recent years of around 2.34%. This also explains why the share price has been tending to fall for quite some time. However, it should be noted that FHZN is at least not inflicting a double penalty on its owners. It has not issued any additional shares in recent years. That's already something.

Over the last five years, the average return for shareholders, despite a seemingly generous dividend before the 2019 financial year, only amounted to 1,48%. Obviously the dividend cut did not help, but it was mainly the use of debt that weighed on everything.

Franchise

The paradox is that FHZN has remarkable intrinsic qualities. As noted dividend in 2018:

The business model of an airport operator is timeless: neither the Internet nor 3D printers can save passengers from having to physically go to an airport to catch their flight... and therefore pay the airport tax. This is a real franchise!

This translates as we have seen into incredible profitability (gross margin of 86% and net margin of 25%). Overheads are also well controlled (31.7%). The problem over the last five years is that this has not translated into cash flow. The cause: fairly significant capital expenditure (116% of profit on average).

Financial strength

The Z-Score (Altman) is 2.35, placing FHZN in the grey zone. This means no imminent risk of bankruptcy, but no absolute security either. This was somewhat expected given the debt and liquidity. We obviously imagine that the 2020 figures will not improve the situation. Nevertheless, we have seen that the Zurich company was able to count on a significant bank loan. Partial unemployment and the possibility of bridging loans from the Confederation should also allow it to get through this period.

Conclusion

With Flughafen Zurich, we are in the big league. Institutionals, and not the least, are jostling for position. These include Vanguard, Norges Bank, Blackrock, Dimensional Fund, Credit Suisse, UBS and T. Rowe. As they say, there are some great people. A little too many even...

In short, FHZN is certainly a nice franchise, but it needs to solve its cash flow problems first. I therefore advise against buying. A hold is possible, however, for investors with a long-term perspective.