Sensitivity analysis

The estimated value in the DCF-model is based on both objective and subjective assumptions. These may vary if another analyst considers other factors to be more relevant. To estimate the value in the base case scenario, different assumptions have been made in relation to the forecast. Several different strategic models have been included, which has led to an analysis of Wizz Air's strengths, weaknesses, opportunities and threats. While the analysis follows the framework of the strategic models, there are still a number of subjective assumptions that have been made when these analyses have been prepared. This applies to the choice of factors that have been analysed and which may be different from other analysts. In relation to the financial analysis, this is based on both objective and subjective assumptions. The historical accounts are objective, while the forecast is subjective. Therefore, a valuation is based on many subjective assumptions, which creates a high degree of uncertainty in relation to the estimated value of the company. Hence, a sensitivity analysis is prepared to assess how sensitive the estimated value is to changes in inputs.

8.4.1 Change in WACC and terminal growth rate

The first sensitivity analysis that will be prepared is based on the same assumptions as in the DCF model, which means that the financial value driver that was forecasted remains the same with no changes. This analysis shows how sensitive the share price is if there is a change in either WACC or

34.99 29.25

38.18 43.59 38.82

Share price DCF-model P/B EV/EBITDA EV/Invested Capital

the growth rate or if both WACC and the growth rate change at the same time. In relation to WACC, there is risk associated with this, as the estimated WACC is based on many assumptions, such as the capital structure, required rate of return on equity and debt. Furthermore, the growth rate in the terminal period is based on the nominal GDP in Hungary, which is also associated with a certain risk, as the nominal GDP has been high in Hungary for the last 10 years. Figure 30 shows that the WACC varies from 8.91% to 11.91%, which is a change of ± 1,5% of the estimated WACC. In addition, the growth rate in the terminal period varies from 4.25% to 5.75%, which is a change of ± 0.75% of the determined growth rate in the terminal period.

Figure 30: Change in WACC and terminal growth rate WACC

Terminal growth rate 8,91% 9,41% 9,91% 10,41% 10,91% 11,41% 11,91%

4,25% 43,73 35,63 29,05 23,61 19,07 15,21 11,92 4,50% 47,17 38,31 31,17 25,33 20,47 16,38 12,90 4,75% 51,02 41,27 33,51 27,20 21,99 17,63 13,94 5,00% 55,37 44,58 36,08 29,25 23,64 18,99 15,06 5,25% 60,32 48,28 38,93 31,49 25,44 20,45 16,26 5,50% 65,98 52,45 42,10 33,96 27,40 22,03 17,56 5,75% 72,55 57,19 45,65 36,69 29,55 23,76 18,97

Source: Own creation

As shown in figure 30, the share price varies between 11.92 Euros and 72.55 Euros if the highest WACC and highest growth rate are used. However, this is a very unlikely. Therefore, the area where there is a change in WACC of ± 0.5% and a change in growth rate of ± 0.25% will only be investigated.

From this area it can be seen that the share price varies from 21.99 Euros to 38.93 Euros. Therefore, even very small changes in the WACC and in the terminal growth rate can lead to large fluctuations in the share price.

8.4.2 Increase in passenger growth

In the second sensitivity analysis, forecasted passenger growth increases by 1% each year in the 10-year forecast period. As with the WACC and terminal growth rate, there is also a great risk associated with the forecasted passenger growth rate due to Covid-19, which has caused a sharp decline in the number of passengers. In this scenario, therefore, it is examined what significance it has on the share price if there is an increase in passenger growth of 1% each year.

Figure 31: Increase in passenger growth of 1% each year WACC

Terminal growth rate 8,91% 9,41% 9,91% 10,41% 10,91% 11,41% 11,91%

4,25% 58,17 47,92 39,60 32,72 26,97 22,10 17,93 4,50% 62,52 51,31 42,29 34,90 28,75 23,58 19,17 4,75% 67,40 55,06 45,24 37,26 30,68 25,16 20,49 5,00% 72,90 59,24 48,50 39,85 32,76 26,87 21,91 5,25% 79,15 63,92 52,10 42,68 35,04 28,72 23,43 5,50% 86,32 69,20 56,11 45,81 37,52 30,72 25,07 5,75% 94,63 75,20 60,60 49,27 40,24 32,90 26,85

Source: Own creation

Figure 31 shows that the share price increases to 39.85 Euros in the base case scenario if there is an increase in passenger growth of 1% each year. Therefore, it shows that even a small increase of 1%

in passenger growth per year will result in a 36% increase in the share price. Figure 31 also shows that the share price fluctuates from 17.93 Euros to 94.63 Euros with a change in WACC and terminal growth rate. As with the first analysis, this is considered to be very unlikely. Therefore, again, only the highlighted area in the middle of figure 31 is investigated, where a change in WACC of ± 0.5%

and terminal growth rate of ± 0.25% appears. In this area, the share price fluctuates between 30.68 Euros and 52.10 Euros, with a slight change in WACC or terminal growth rate or with a change in both WACC and terminal growth rate. Hence, an increase of 1% per year in passenger growth will result in an increase in the share price by 36% and at the same time small changes in the WACC and in the terminal growth rate can lead to large fluctuations in the share price.

8.4.3 Increase in fuel cost

The strategic analysis revealed that Wizz Air's largest operating expense is fuel cost, which accounted for 34.5% of operating expenses in the 2020 financial year. In this sensitivity analysis, fuel cost is therefore adjusted by an increase of 1% in the 10-year forecast period as well as in the terminal period. As shown in figure 32 a 1% increase in fuel cost results in a share price of 20.21, which is a relatively large decrease compared to share price in the base case scenario.

Figure 32: Increase in fuel cost of 1% each year WACC

Terminal growth rate 8,91% 9,41% 9,91% 10,41% 10,91% 11,41% 11,91%

4,25% 32,65 25,69 20,04 15,37 11,47 8,16 5,33 4,50% 35,61 27,99 21,87 16,85 12,68 9,16 6,17 4,75% 38,92 30,54 23,87 18,46 13,98 10,24 7,07 5,00% 42,65 33,38 26,08 20,21 15,40 11,40 8,03 5,25% 46,90 36,56 28,53 22,14 16,94 12,65 9,06 5,50% 51,77 40,14 31,25 24,26 18,63 14,02 10,18 5,75% 57,40 44,22 34,30 26,61 20,48 15,50 11,38

Source: Own creation

In addition, it also appears from figure 32 that the share price fluctuates between 5.33 Euros and 57.40 Euros in the event of a change in WACC and terminal growth rate. As with the other two analyses, this is also considered unlikely. Therefore, the focus is again only on the marked area, where the share price ranges between 13.98 Euros and 28.54 Euros by a change in WACC or terminal growth rate or in both. This is considered to be more likely. Hence, an increase in fuel cost of 1%

leads to a much lower share price.

8.4.4 Summary

From the sensitivity analysis, it appears that even small changes in WACC or terminal growth rate can lead to a large change in the estimated share price. In addition, it turned out that an increase in passenger growth rate of 1% will lead to an increase in the share price of 36%. Finally, it turned out that an increase in fuel cost of 1% will lead to a much lower share price.