Finnair - Flying high again

Finnair announced the terms of its rights offering, which in our view contained no material surprises. We still expect Finnair’s earnings to remain high going forward, however we see current trading levels elevating multiples too high.

The rights offering terms included no material surprises

The offering has a ratio of 27/2 for new shares vs existing ones, and the 19bn shares offered at the EUR 0.03 per share subscription price will raise Finnair some EUR 570m in gross proceeds. The fully underwritten offering has its subscription period Nov 3-17; the rights can be traded Nov 3-13. The TERP is a bit below EUR 0.05, to which the EUR 0.03 subscription price implies a 39% discount, and the value of a right is thus EUR 0.23.

Strong balance sheet and high earnings going forward

Finnair targets financial leverage of 1-2x (net debt to comparable EBITDA, which will now be about 1.5x) by the end of FY ‘25 and looks to reinstate dividends from the same year onwards (based on FY ’24 earnings). In our view the strengthened balance sheet and recovered earnings level mean the company will be positioned to begin the renewal of its narrow-body fleet in a few years’ time. In our opinion it shouldn’t be too hard for Finnair to hit the EUR 180m EBIT midpoint of its guidance range for the year even though airline profitability outlook has weakened a bit since the summer months. Finnair might well have topped EUR 200m in a more favorable environment, however we still expect EBIT to stay at around EUR 190m despite the headwind caused by higher jet fuel prices.

Current earnings multiples limit potential for gains

Finnair now trades around 10.5x EV/EBIT and would be valued a bit above 9x EV/EBIT on our updated TP of EUR 0.05, compared to the median peer level of slightly below 7x. Airlines’ earnings levels are still expected to advance next year as FY ’24 top line growth is estimated at around 7% while y/y EBIT margin gains are seen to be roughly around 100bps. In this light our estimates for Finnair are rather conservative as we estimate only 3.5% growth and flat margins going forward; from this perspective downside risks to our estimates seem quite limited for now, however Finnair’s current earnings multiples in our view limit upside potential even in the case of continued profitability improvement. Our new rating is therefore SELL (HOLD).

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