Proactive Investors - Wizz Air Holdings PLC (LON:WIZZ) copped a surprisingly bearish sell rating after Liberum initiated coverage on the Hungarian budget airline carrier this week.
Despite being the fastest-growing budget airline in Europe, analysts at broker criticised Wizz Air’s pursuit of “less-competitive but less-attractive markets” in Eastern Europe.
“Strategy going east, value going south,” as Liberum’s Gerland Khoo put it.
Liberum’s outlook is in stark contrast to the broader market consensus. Particularly UBS, which upgraded the London-listed airline in June on the prospects of a return to profitability in 2024.
Yet Liberum’s contrarian view comes with some reasonable justifications beyond Wizz Air's focus on Eastern Europe.
Firstly, the group is leveraged with debt from its extensive use of leases for new aircraft additions, something “overlooked in consensus”, said Khoo.
“We believe the market is overlooking the impact of higher interest rates on future aircraft ownership costs, as well as the significant uplift to lease liabilities as Wizz Air’s new aircraft deliveries accelerate in the coming years,” the research note explained.
Secondly, Wizz Air’s “vulnerability to competition” against the likes of Ryanair (LON:0RYA) and easyJet (LON:EZJ) should not be forgotten.
However, low non-fuel unit costs act as a value driver for the carrier, while a favourable balance of industry demand to supply adds to the bull-side case.
Regardless, Liberum sees downside on the way, with a target share price of 2,200p against a publication price of 2,705p.