Liberum upgrades Wizz Air to 'hold' but uncertainty remains

(Sharecast News) - Broker Liberum has raised its rating on low-cost airline Wizz Air from 'sell' to 'hold', saying the recent drop in the shares has balanced the risk and reward. "Recent share price weakness has brought the share price in line with our target price [2,000p]," said analyst Gerald Khoo.

The stock now trades at 7.5 times fully diluted earnings for the year to March 2024, and at an enterprise value-to-EBITDA ratio of 4.8.

However, Khoo said that ongoing engine issues remain the "biggest uncertainty for the group at this stage", with the impact on operations for the current and following years still unclear.

Wizz Air announced on 11 September that issues with the Pratt & Whitney (P&W) Geared Turbofan (GTF) engine, which powers all of its A320 NEO family aircraft, will reduce capacity by 10% in the second half.

Khoo explained that the problem is a result of a potential contamination of powdered metal used to manufacture certain components, which means that affected engines will need to be disassembled and inspected earlier than normal.

"Once the engines have reached the specified usage milestones (based on either flying hours or flight cycles), the engines cannot be used until they have been inspected. The time taken for the inspections and the long waiting time to access engine workshops means that affected aircraft could be grounded for a considerable time," he said.

Nevertheless, he said that Wizz Air has "some levers to pull" to mitigate the impact here, such as extending leases of aircraft due to eave the fleet over the next year, or some compensation from P&W - though it will have to wait four to six weeks for an update from P&W.

Aside from the engine problems, Khoo said that Wizz Air's high leverage was "still a concern", with the forecast debt position at the end of this year at 3.0 times EBITDA - though this should fall to 2.0x in the year to March 2026.

The stock was up 3% at 1,974.5p by 0947 BST.