Finnair - Upside remains on the elusive side

The Q4 report didn’t deliver any major surprises

Finnair’s Q4 revenue grew to EUR 414m, compared to the EUR 452m/387m Evli/cons. estimates. Adj. EBIT landed at EUR -65m vs the EUR -95m/-90m Evli/cons. estimates. Q4 cargo revenue was very high, but Q1 losses are likely to be well above EUR 100m due to Omicron and ramp-up costs. Finnair sees some delay to the opening of most of Asia, which was to be expected.

The whole airline industry is staging rebound this year

Omicron doesn’t seem to be a major negative, only a short-term issue, but losses still loom in Q2. Meanwhile Finnair implements a EUR 200m investment in improved long-haul experience with refitted seats, and we also expect Finnair’s fixed costs savings will continue to come through; inflation relating to e.g. Helsinki airport charges is modest compared to those of larger hubs. Finnair’s long-term profitability potential is no worse considering the fleet renewal and cost positioning, but high jet fuel prices continue to limit the whole industry’s profitability potential.

Valuations continue to reflect surging earnings levels

We believe other airlines’ valuations will continue to drive Finnair’s multiples: Finnair’s profitability will materialize later due to the Asian reliance, but it will nevertheless come through at a certain level. In our view the most essential uncertainty, for Finnair as well as other airlines, now lingers around overall operating cost levels, particularly with respect to jet fuel prices. Higher ticket prices could compensate, but we view such increases still to be uncertain. Air traffic will continue to rebound across the globe, including Asia as well, and is set to reach the pre-pandemic levels sooner or later. We estimate Finnair’s FY ’22 EBIT is most likely to remain in the red, while some other airlines should be able to reach high profitability this year. We believe the anticipation and materialization of these profits will determine Finnair’s valuation over the course of this year. In our view Finnair’s current valuation, ca. 12x EV/EBIT on our FY ’23 estimates, is somewhat neutral relative to other airlines, however overall sector valuations may still stand on the optimistic side. We retain our EUR 0.60 TP; our rating is now HOLD (SELL).