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No big surprises, but Q3 profitability will not much improve

Finnair’s Q2 revenue amounted to EUR 112m, below the EUR 142m/145m Evli/cons. estimates. Passenger, ancillary and cargo revenues were all soft compared to our estimates, but travel is resuming as passenger revenue topped that for cargo in June. Working capital situation is beginning to improve due to growing bookings and Finnair expects monthly OCF to turn positive by the end of this year. The situation, however, remains challenging from profitability perspective. Finnair’s Q2 adj. EBIT was EUR -151m, compared to the EUR -144m/-144m Evli/cons. estimates. Finnair sees similar losses for Q3 as well. We revise our Q3 adj. EBIT estimate to EUR -132m (prev. EUR -91m).

Cost savings support profitability amid volume challenges

Finnair turned more cautious regarding the following years’ travel rebound, not a big surprise considering the latest developments. Asian vaccination rates have begun to pick up and important Northeast Asian countries are expected to have fully vaccinated 70% of their population during Q4. Finnair’s passenger volume rebound will lag those of Western short-haul focused carriers, but meaningful recovery should begin to materialize during the next few quarters. We now expect Finnair to reach ca. 90% of FY ’19 business levels (in terms of ASK & RPK) in FY ’23. We revise these estimates down a few percentage points and now expect EUR 2.8bn top line for FY ’23 (prev. EUR 3.0bn). Meanwhile Finnair’s upsized permanent cost savings projection supports our EBIT estimates. In our view the company could achieve healthy EBIT margins already next year and we see potential for 7% profitability in FY ’23. We have made only very small revisions to our absolute profitability estimates.

In our view profitability potential has been fully valued

In our opinion Finnair is set to return to good profitability levels, however this potential has been appreciated for a while. Finnair is valued roughly 15x EV/EBIT on our FY ’22 estimates, not an unreasonable level compared to other airlines but nonetheless fully valued given the persistent level of uncertainty. Our TP is now EUR 0.65 (0.7) and we retain our HOLD rating.

Source: Finwire News.