Wizz Air Holdings PLC (AIM:WIZZ) faces a slower earnings recovery than the almost "hockey stick" that investors expect, leading RBC Capital Markets to downgrade the budget airline.
Moving to an 'underperform' rating from 'sector perform', the investment bank kept its £9 share price target, implying about 20% downside from the last close, arguing that the market is pricing in a much stronger rebound in profits than its forecasts support.
Analyst Ruairi Cullinane cut his earnings forecasts for the 2027 and 2028 financial years despite lower fuel prices, saying pressure on ticket yields and higher non-fuel costs were likely to outweigh the benefit of cheaper oil.
He also warned that rapid capacity growth in Central and Eastern Europe could weigh on fares beyond the summer peak.
The "poor quality" of Wizz Air's earnings in the current year was cited, with Cullinane arguing they were weaker than headline figures suggested as results were boosted by €542 million of one-off income, mainly compensation payments and sale-and-leaseback gains, as well as €102 million of foreign exchange gains, benefits that are unlikely to be repeated.
Although he expects profitability to improve over the next few years, the analyst forecasts operating margins of only about 6%-7% by the 2030 financial year, below the double-digit levels the airline achieved before the pandemic.
He judges that management's longer-term ambitions are to return to double-digit % margins, delivered pre-pandemic, with a capital markets day planned for September "an opportunity to convince on the building blocks to higher levels of profitability".
