Wizz Air-Extreme cheap valuation, paradigm change should begin

• We upgrade Wizz Air to Buy from Neutral regardless the increasing likelihood of the need for additional financing, including capital as well. Our TP is set at 30 GBP/sh, implying 61% upside potential to the current share price as of writing.
• Since our downgrade dated back to 29 April, shares in Wizz Air have fallen over 40%. As a result, valuation of Wizz appears extremely cheap despite short-term risks. Though the outlook of European airlines, we admit, is very challenging and visibility is limited, long-term prospects for Wizz remained intact.
• Wizz Air is being impacted by a bunch of unfavourable factors e.g. war in Ukraine, rising fuel prices, inefficient oil hedges vs. peers, weak CEE FXs and strong USD, rising inflation, excess profit tax in Hungary and staffing shortages. In addition, Wizz will need to raise fresh liquidity soon. As a result, we do not rule out an equity increase, however, the mgmt. admittedly wants to avoid this.
• As we highlighted in March, the market has started to price in the worst case scenario. Having said that, we bet on accelerating market consolidation if current conditions persist after summer as this makes the fragmented European airline industry unsustainable. In addition, if fuel hedges run out at rivals, Wizz will be well-positioned again to widen its competitive edge due to the young fleet. We also expect the dominant paradigm to take a U-turn and airline financing will be cut off state coffers. As a result, Wizz’s strategy will prevail.
• Wizz Air trades at an all-time low FY2 P/E of 4.7x (vs. 5-Y FY2 avg. of 10.5x) and an EV/EBITDA of 3.8x (vs. 4.4x), based on our estimates.