Finnair - Visibility remains short

Finnair’s Q4 was surprisingly strong, but guidance for 2019E indicates the operating environment will remain at least as tough as in H2. Valuation appears largely fair to us – we hence retain “Hold” rating.

Q4: fuel and yield behind the earnings beat

Finnair’s Q4 adj. EBIT came in well above estimates at EUR +9m vs. EUR -9m Evli and EUR -6m cons. Compared to our estimates the beat was driven by somewhat stronger revenue (EUR 683m vs. EUR 671m) and fuel costs, which were EUR 10m less than what we expected. On the revenue side the beat was driven by unit revenues –RASK declined less than we expected, and yield surprisingly grew by 3.5% while we expected yield decline to continue as increased competition had been flagged during H2.

Increasing competition and potentially softer demand

For 2019E Finnair guides ASK growth of 10% and revenue growth slightly behind ASK. We expected only 5% ASK growth for 2019E. Finnair will receive both of its 2019-delivered new A350s during H1, on top of which the Dec 2018 -delivered A350 will contribute to ASK growth. Added capacity will be mostly put to Asian routes. However, at the same time competition is expected to increase further with capacity increases, especially on routes between Europe and Asia and in intra-European traffic, even though Norwegian’s planned capacity cuts may impact Finnair positively on some routes. At the same time, demand is seen to be at risk of softening with slowdown in economic growth. Increasing competition and potentially softer demand keep visibility short even though fuel appears to have stabilized.

Retaining “Hold”

On our estimates Finnair trades at an EV/EBITDA discount, but at a P/E premium to its primary peers. On P/B Finnair trades 0.9x in FY19E, or 1.1x when the EUR 200m hybrid removed from equity, while generating ROCE of ~8.5% in FY19E, close to our WACC (8.9%). We continue to think valuation does not look too attractive and hence we retain “Hold” rating with TP of EUR 7.3 (6.8). Our TP values the shares at par with Finnair’s 3yr historical P/E on our FY19E estimates.

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