Equity Research Quick Bite Preview 22 October 2013 Air France-KLM Q3 due 31 October More restructuring needed Supported by lower fuel costs and the ramp up in cost savings, we expect Q3 to deliver a solid improvement in the EBIT loss from the rather depressed level last year. Apart from the update on current trading, the key focus is on the implementation of the Transform 2015 programme and the recently announced additional restructuring measures. Despite the solid earnings progression we expect for Q3, we remain sceptical on the earnings prospects for the French base concept and are clearly negative on any potential further investments in Alitalia. Q3 results preview Q3 2012A Con. Q3 13E CB Q3 13EChange FY 12A Con. FY 13E CB FY 13E Change Sales ( m) 7,186 NA 7,263 1.1% 25,649 26,062 25,851 0.8% EBIT ( m) 506 NA 635 25.5% -300.0 181.5 167.8 NM EPS ( ) 1.03 NA 0.99-4.6% -4.03-1.01-1.33-67.0% Full-year guidance: indicative outlook for an EBIT of about 150m, company data Q3 EBIT estimate 635m We expect mixed trading for the passenger unit with ongoing strong momentum on the North Atlantic but persisting yield weakness on routes to the Middle East and to Asia due to currency headwinds and competitive pressure. Earnings in the passenger unit are also expected to be supported by lower fuel costs (CB: 70m lower year on year) and the ramp up in cost savings. Also taking into account very weak trading in airfreight, we forecast clean EBIT for Q3 of 635.0m, up 129m or 25.5% year on year. Ambitious restructuring remains the key priority Apart from an update on current trading, the key focus from investors is on progress in the implementation of the Transform 2015 programme and the additional restructuring measures seeking a further reduction in the workforce of 2,800 FTEs (about 3% of total). In this context, Air France has recently reached an agreement on the voluntary departure of c. 1,800 ground crew and announced a related restructuring charge of 200m which is not yet incorporated into our full-year forecasts. Reiteration of Hold Our valuation is based on the combination of a DCF and a normalised earnings approach and arrives at an updated fair value of c. 7.00/share. Despite the solid earnings progression we expect for Q3, we remain sceptical on the earnings prospects for the French base concept and are clearly negative on any potential further investments in Alitalia. As a result, we maintain our Hold rating for the time being but are likely to review our estimates and recommendation on the back of Q3 reporting. Key Data Year-end Dec 2011 2012 2013E 2014E 2015E 2016E CAGR 2013-16E Sales rep. ( m) 24,402 25,649 26,073 26,749 27,632 28,545 3.1 % EBITDA adj. ( m) 1,289 1,291 1,893 2,416 2,748 2,953 16.0 % EBITDA rep. ( m) 1,289 1,291 1,893 2,416 2,748 2,953 16.0 % EBITA adj. ( m) (353) (300) 236 730 1,023 1,185 71.4 % EBITA margin (1.4%) (1.2%) 0.9% 2.7% 3.7% 4.2% EBITA rep. ( m) (353) (300) 236 730 1,023 1,185 FCF pre-div ( m) (895) 606 (12.8) 878 919 947 FCF yield (43.4%) 36.6% (0.6%) 39.1% 40.9% 42.2% EPS rep. ( ) (2.73) (4.03) (0.51) 0.86 1.66 2.13 EPS adj. ( ) (2.73) (4.03) (0.51) 0.86 1.66 2.13 DPS ( ) 0.00 0.00 0.00 0.00 0.00 0.00 EV/Sales (x) 0.2 0.1 0.2 0.1 0.1 0.1 EV/EBITDA (x) 2.9 2.5 2.4 1.5 1.1 0.7 EV/EBITA (x) n.m. n.m. 19.0 5.1 2.9 1.8 P/E (x) n.m. n.m. n.m. 8.8 4.6 3.6 Div yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Net debt ( m) 9,175 7,733 8,611 7,869 7,094 6,299 Net debt/ebitda (x) 7.1 6.0 4.5 3.3 2.6 2.1 Source: Company, Commerzbank Corporates & Markets Hold TP 6.50 CP 7.59 (Close 21 October 2013) Expected performance (14.4%) Volatility (60d, realized) 43.2% Risk-adjusted performance - Bloomberg / Reuters: AF FP, AIRF.PA Market cap ( m) 2,246 EV ( m) 3,743 Shares outstanding (m) 296 Free float 84.3% Dly trading vol (last 3-mth) ( m) 30.2 Changes in estimates m 2013o 2013n 2014o 2014n Sales 26,073-26,749 - EBITA 236-730 - EPS (0.51) - 0.86 - Relative and absolute performance Source: Bloomberg Next news event: 31 October 2013 Q3 2013 Major shareholders: French State (15.7%) Sources: Bloomberg, Commerzbank Corporates & Markets, Company data Analyst Frank Skodzik +49 69 136 22625 frank.skodzik@commerzbank.com research.commerzbank.com For important disclosure information please see pages 4 and 5.
TABLE 1: P&L headline data m Q3 12A CB Q3 13E Change Con. Q3 13E Comments Revenue by units Passenger 5,694.0 5,712.3 0.3% 2.5% increase in volumes (RPKs) combined with an estimated yield decrease of 2.0% yoy Cargo 758.0 709.2-6.4% Volume decline of 3.1% yoy plus an estimated yield decrease of 3.5% Maintenance (MRO) 256.0 294.4 15.0% Delivery of rather stable revenue and earnings contributions Others/Consolidation 476.0 547.4 15.0% Mostly includes catering and leisure operations Group revenues 7,184.0 7,263.3 1.1% NA EBIT by units Passenger 453.0 560.0 23.6% Cargo -67.0-50.0-25.4% Maintenance (MRO) 52.0 55.0 5.8% Others/Consolidation 68.0 70.0 2.9% Group EBIT 506.0 635.0 25.5% NA Fuel costs estimated to be down by about 70m yoy EBIT-margin 7.0% 8.7% Net profit 306.0 291.8-4.6% NA Q3 2013 includes estimated restructuring charge of 200m; Q3 2012 includes goodwill write-down on KLM of 168m Net profit-margin 4.3% 4.0% EPS 1.03 0.99-4.6% 2 22 October 2013
TABLE 2: Financials Balance Sheet ( m) 2012 2013E 2014E 2015E 2016E CAGR 2013-16E Property, plant & equipment 11,980 11,642 11,415 11,444 11,601 (0.1%) Intangible fixed assets 842 774 706 638 570 (9.7%) Goodwill 252 252 252 252 252 Total operating fixed assets 13,074 12,668 12,373 12,334 12,423 (0.7%) Net working capital (5,011) (5,012) (5,142) (5,312) (5,487) 3.1% as a % of sales (19.5%) (19.2%) (19.2%) (19.2%) (19.2%) Operating invested capital 13,611 12,530 12,105 11,724 11,504 (2.8%) ROIC (%) (2.3%) 1.4% 4.5% 6.5% 7.6% IC/sales (x) 0.5 0.5 0.5 0.4 0.4 Investments 6,821 6,821 6,821 6,821 6,821 0.0% Capital employed 19,053 18,193 17,841 17,630 17,603 (1.1%) ROCE (1.6%) 1.0% 3.0% 4.3% 5.0% Cash and cash equivalents 4,360 3,610 3,026 3,945 4,892 10.7% Interest-bearing liabilities 10,999 9,962 8,500 8,500 8,500 (5.2%) Interest-bearing provisions 1,094 2,260 2,395 2,539 2,691 6.0% Net debt 7,733 8,611 7,869 7,094 6,299 (9.9%) thereof pension provisions 1,094 2,260 2,395 2,539 2,691 Total equity 4,980 3,735 3,995 4,491 5,125 11.1% Equity Ratio 18.1% 14.1% 15.6% 16.9% 18.4% ROE (20.2%) (2.4%) 7.8% 12.6% 14.0% Total assets 27,474 26,442 25,650 26,643 27,795 1.7% Income Statement ( m) 2012 2013E 2014E 2015E 2016E CAGR 2013-16E Sales 25,649 26,073 26,749 27,632 28,545 3.1% growth y-o-y 5.1% 1.7% 2.6% 3.3% 3.3% Operating expenses 24,358 24,180 24,333 24,884 25,593 1.9% EBITDA 1,291 1,893 2,416 2,748 2,953 16.0% as a % of sales 5.0% 7.3% 9.0% 9.9% 10.3% Depreciation and intangible amortisation 1,591 1,657 1,686 1,724 1,767 2.2% EBITA (300) 236 730 1,023 1,185 71.4% as a % of sales (1.2%) 0.9% 2.7% 3.7% 4.2% Impairments 0.0 0.0 0.0 0.0 0.0 EBIT (300) 236 730 1,023 1,185 as a % of sales (1.2 %) 0.9 % 2.7 % 3.7 % 4.2 % Net interest result (353) (328) (275) (250) (225) (11.8%) Result from participations 0.0 0.0 0.0 0.0 0.0 Other financial result (441) (50.0) (50.0) (50.0) (50.0) Adjustments 0.0 0.0 0.0 0.0 0.0 PBT (1,094) (142) 406 724 911 n.a. Tax expense (27.0) 36.9 (105) (188) (237) n.a. Adjustment 0.0 0.0 0.0 0.0 0.0 Tax rate (2.5%) 26.0% 26.0% 26.0% 26.0% Net profit from continuing operations (1,121) (105) 300 535 674 n.a. as a % of sales (4.4%) (0.4%) 1.1% 1.9% 2.4% Minorities (71.0) (44.9) (44.9) (44.9) (44.9) Net income attributable to shareholders (1,192) (150) 255 491 629 n.a. Cash Flow Statement ( m) 2012 2013E 2014E 2015E 2016E CAGR 2013-16E Operating cash flow 851 1,239 2,269 2,605 2,803 31.3% as a % of sales 3.3% 4.8% 8.5% 9.4% 9.8% Gross capex (1,472) (1,252) (1,391) (1,686) (1,855) 14.0% Asset disposals 1,212 0.0 0.0 0.0 0.0 Net financial investments 54.0 0.0 0.0 0.0 0.0 Net acquisitions (39.0) 0.0 0.0 0.0 0.0 Gross capex as a % of sales 5.7% 4.8% 5.2% 6.1% 6.5% Gross capex as a % of depreciation 92.5% 75.5% 82.5% 97.8% 105.0% Free cash flow 606 (12.8) 878 919 947 n.a. as a % of sales 2.4% 0.0% 3.3% 3.3% 3.3% Dividends (2.0) 0.0 0.0 0.0 0.0 Free cash flow (post dividend) 604 (12.8) 878 919 947 Increase / (decrease) in debt 429 (1,037) (1,462) 0.0 0.0 Increase / (decrease) in equity 0.0 0.0 0.0 0.0 0.0 Other financing cash flows 7.0 0.0 0.0 0.0 0.0 FX effects (3.0) 0.0 0.0 0.0 0.0 Other items 819 0.0 0.0 0.0 0.0 Change in cash 1,856 (1,050) (584) 919 947 22 October 2013 3
Reference to first page of disclaimer Air France-KLM price chart Distribution of ratings: Number of recommendations from Commerzbank, CM- Research, at the end of the third quarter 2013 103 (50.4%) Buy / Add 25 (62.4%) 75 (36.8%) Hold 11 (27.6%) 26 (12.8%) Sell / Reduce 4 (10.0%) thereof recommendations for issuers to which investment banking services were provided during the preceding twelve months This document has been created and published by the Corporates & Markets division of, Frankfurt/Main or Commerzbank s group companies mentioned in the document. Commerzbank Corporates & Markets is the investment banking division of Commerzbank, integrating research, debt, equities, interest rates and foreign exchange. 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