Finnair - Coming through the storm

Finnair’s Q4 report was a bit better than expected, however we see current valuation limiting upside potential too much unless more positive surprises are yet to come.

Q4 report a bit better than expected but nothing major

Finnair’s EUR 687m Q4 revenue was near the EUR 679m/681m Evli/cons. estimates as passenger revenues were some EUR 20m higher than we estimated (ancillary and cargo were a bit soft relative to what we expected). Finnair’s Q4’22 saw 79% of ASK relative to Q4’19, including wet leases, as demand stays high. Fuel prices remained high in the historical context, a crucial factor limiting EBIT when Finnair still missed major volumes due to the recent years’ double whammy. Finnair achieved another positive adj. EBIT, at EUR 17.9m vs the EUR 13.5m/2.7m Evli/cons. estimates, as unit yields continued to advance. Prices should hold up also in Q1 and beyond as demand persists despite potential economic headwinds. We didn’t find any big surprises in terms of cost inflation, but the topic remains very much on the agenda as Finnair continues to proceed towards its 5% EBIT margin target.

Volumes and pricing support profitability development

There are still uncertainties around Chinese demand in particular; from Finnair’s point of view the focus now rests much on Shanghai and Beijing, as opposed to any secondary Chinese cities. Finnair has extended its wet leases, and dynamic pricing has helped unit revenues increase by 25%; ancillary revenue per passenger also increased by 13% compared to 2019. Hence Finnair’s revenue will increase significantly this year, but we expect it to remain 10% short of that for FY ’19. We believe Q1’23 EBIT will be negative as the market has recovered enough so that certain seasonal patterns can again be seen, but for FY ’23 we estimate a positive EBIT of EUR 105m.

Coming through, but most good news seem to be priced in

In our view Finnair is set to achieve a positive EBIT this year, and the positive development should continue in FY ’24, but the company’s profitability continues to lag other airlines. Finnair is valued about 16x and 10x EV/EBIT on our FY ’23-24 estimates, which are levels well above peers’. We see Finnair’s recovery already priced in and hence upside would probably require more than one factor to deliver a positive surprise. We update our TP to EUR 0.47 (0.45) but retain our SELL rating.

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