Wizz Air: Do you want to go to the seaside? (upgraded to BUY)

Wizz Air is down some 5% since we downgraded the stock in December 2020, having underperformed the broader European equities by over 15% over the period. We maintain our view that the yield environment is likely to be challenging in the summer, due to excess capacity, and we have increased our loss estimate for FY22E. Despite this, we believe that the current share price levels seem like a good entry point for investors with horizons of 12M and longer. While the visibility on the level of demand this summer remains limited, and we see a risk that it could fall short of the industry’s expectations, we see the progress on the vaccinations as clearly positive for a medium-term normalisation of air travel. By summer 2022E, Wizz should have around 40% higher seat capacity than it did pre-pandemic. Its cost leadership – improved further by the ongoing transition into A321neos – makes Wizz ideally positioned to benefit from the eventual rebound in demand. We believe the impressively fast ramp-up of capacity last summer underscores Wizz’s agility in capacity planning, which is crucially important in the current environment. If the bankruptcies or financial difficulties of weaker carriers lead to a reduction in short-haul capacity, we believe we could see an improved margin environment once demand begins to normalise. While we believe FY22E is likely to remain weak, the following financial years could see profits north of EUR 500m, in our view. Historically, Wizz’s earnings have ranged around EUR 250-300m, in its most profitable years. We set our new 12M price target (PT) at GBP 54/share, and upgrade the stock to BUY.