Wizz Air: difficult year ahead, but sell-off excessive (stays BUY)

We have made substantial downward adjustments to our Wizz Air forecasts, to try to reflect the rapidly changing environment. As long as the NATO borders remain secure, we expect people to continue to fly in Europe and – as the COVID-19 restrictions continue to ease – we see a good chance that traffic will rebound substantially during the summer. However, we see a high risk of an abrupt global economic slowdown as a result of the tragic war that Russia is waging on Ukraine. Combined with the energy price shock, this may dent purchasing power, the impact of which may be exacerbated by possible changes in spending patterns. In the absence of hedges, the high fuel costs are likely to weigh on margins, as would increases in rates, albeit the latter would affect figures only gradually, as more than 90% of leases are fixed rate. We believe Wizz Air may scale back its growth plans, and we see a risk that a return to tangible profitability could be delayed to FY24E, as excess capacity could make it difficult to pass on the fuel costs onto the customers during FY23E. Still, the modern fleet and low unit costs should help offset the impact of the high fuel price environment, and the difficult external conditions could speed up the consolidation of the sector. We cannot rule out further near-term pressure on the share price as the flight to safety continues. That said, on a 12M+ horizon, we see Wizz Air as good value at the current levels, thanks to its industry-leading unit costs and growth prospects. We have adjusted our 12M price target (PT) to GBP 40/share and we reiterate our BUY rating on the stock.