Finnair - Delivering on Asian strategy

Finnair’s Asian strategy has proven successful and the remaining seven A350s deliveries in 2019-2022E support strategy execution and growth further. Evolution of competition in short-to-mid-term remains a key risk, in our view. We expect earnings to weaken slightly in 2019E and consider valuation as largely fair. We retain “Hold” rating.

A350 fleet carries from Asia to Europe via shortest route

Finnair’s strategy is based on the geographic location of Helsinki hub, as the shortest route from (North-East) Asia to Europe goes over Helsinki. Finnair is able to serve most Asian routes in 24h rotations, which enables high utilization rate of planes and reduces the need for additional crew. New A350s, 12/19 of which were delivered by the end of 2018, are an essential part of the Asian strategy and form the cornerstone of cost management as they have higher seat capacity, lower maintenance cost and better fuel efficiency vs. the replaced A340s. The remaining seven A350s will be delivered in 2019-2022E, enabling further growth.

New A350s enable growth and balance capacity in 2019E

For 2019E Finnair guides 10% capacity growth (largely based on new A350s) and revenue growth slightly behind capacity. New capacity will be mostly put to Asian routes. This should enable further growth and improve weakened PLFs in European traffic, as a good part of capacity adds in 2018 was short-haul. Key risks for 2019E are demand and competition: demand could soften with economic growth, while competition is expected to increase in traffic between Europe and Asia and in intra-European traffic. Fuel is no longer at record levels, although hedged price should continue to edge up. At present we see adj. EBIT, excl. impact of IFRS 16, to weaken slightly in 2019E, assuming steady fuel.

Valuation appears fair - “Hold” reiterated

On our estimates Finnair’s current P/E multiples are 10.8x for 2019E and 9.7x for 2020E, vs. the 3yr historical NTM average of 10.1x. On P/B Finnair trades 1.2-1.1x when the EUR 200m hybrid removed from equity, while generating ROCE of 8.8% in FY19E vs. our WACC of 8.9%. Overall, Finnair’s current valuation appears largely fair to us. We hence retain “Hold” rating with an ex-div TP of EUR 8.0 (7.3). Our TP values Finnair close to par with Finnair’s 3yr historical NTM P/E (10.1x) on our FY19E estimates.

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