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Wizz Air still attractive despite setback
Hungarian low-cost airline Wizz Air (WIZZ) has become the latest budget airline to suffer turbulence. We are still positive on the investment case given the long-term growth potential.
The shares are down around 11% in the wake of 2017 net profit guidance being cut (1 Feb) from a range of €245m to €255m to between €225m and €235m.
MORE RESILIENT THAN RIVALS
Wizz Air could prove to be more resilient than its competitors EasyJet (EZJ) and Ryanair (RYA) who both downgraded profit expectations last year as a weaker pound following the Brexit vote hit earnings.
The airlines were further affected by air traffic strikes and terrorism. EasyJet’s struggles with lower customer demand saw its share price hit a five-year low in October 2016 amid a flurry of broker downgrades.
Wizz is faced with volatile currency movements. These issues are further compounded by the deflationary pressure of lower fuel prices on fares and recent bad weather in Central and Eastern Europe.
Lower fares account for €10m of the profit downgrade according to UBS analyst Jarrod Castle, while €10m resulted from operational disruption and political instability.
HOW WIZZ SHARES CAN TAKE OFF
There are reasons to take encouragement. In 2016, the airline has managed to fly an extra million passengers with only one extra Airbus A321.
Panmure Gordon analyst Mark Irvine-Fortescue has flagged the stock as his top pick in the sector, at least partly on valuation grounds. The shares at £15.83 trade on 9.2 times earnings per share (PE) for the year to March 2018.
This is lower than Ryanair’s PE of 12.1 for the year to March 2018 and EasyJet’s PE of 10.9 times for the year to September 2018.
Irvine-Fortescue believes the market is under-estimating the risks to EasyJet’s forecasts, and argues free cash flow will be materially negative in the full year 2018/2019, which will drive up debt in 2019.
Take advantage of weakness in Wizz Air as this setback will prove a short-term blip in a long-term growth story. (LMJ)