Investment Research General Market Conditions 24 February 2014 Finnair FY 2013 Finnair s fullyear 2013 result was burdened by a weak Q4 13 impacted by oneoff costs. Due to the divestment of assets reported net debt was flattish y/y, somewhat mitigating the 35% drop in EBITDA y/y. Due to the weak Q4 13 adjusted credit metrics are weaker than we expected. As we believe the majority of the earnings miss compared to our estimates is related to oneoff costs, we maintain our view of Finnair as a BB issuer indicatively. However, this is reliant on an expected strengthening of credit metrics during 2014 in the absence of significant oneoff costs. Q4 13 impacted by strike threat and contraction in leisure traffic Finnair s operating result for 2013 declined by EUR47m y/y to EUR5m. The main reason was a weak Q4 13 where the operating result declined from EUR0m in Q4 12 to EUR32m in Q4 13. The worsening of the Q4 13 operating result was driven by a 8.5% y/y decline in revenue impacted by a contraction in leisure traffic, lost turnover arising from a strike threat and the depreciation of the Japanese yen. We estimate that more than half of the operating earnings decline is caused by factors we would consider oneoff in nature hence we do not see a significant underlying worsening of Finnair s operations bearing the normal high operating industry leverage in mind. Despite the weak Q4 13 Finnair realised a net profit of EUR11m in 2013 at the same level as in 2012. However, this is driven by a EUR22m (2012: EUR4m) impact from an unrealised fair value change of derivatives and foreign currency denominated fleet maintenance reserves. Furthermore the net result is impacted by financial income of EUR43m (2012: EUR8m) mainly due to the sale of Finnair s holding of shares in Norwegian Air Shuttle in April 2013 with a capital gain of EUR34m. On a cash flow basis the decline in the operating result was mitigated by a low capex level supported by the divestment of shares in Norwegian and this supported a flattish development in net debt. Credit metrics affected by high industry earnings volatility The relatively stable net debt y/y mitigated the declining operating result and cash flow and left reported net debt to EBITDA at 1.2x vs 0.8x in 2012. Adjusted for mainly operating lease liabilities adj. net debt to EBITDA increased to 4.4x in 2013 vs 2.8x in 2012. Due to the highly volatile airline industry s nature we are not overly worried by the increase in leverage and note that Finnair s equity ratio was relatively stable at 32% vs 35% in 2012. Financial overview (EURm) Key figures 2010 2011 2012 2013 y/y Net Sales 2,023 2,258 2,449 2,400 2% EBITDA 114 70 174 113 35% FFO 75 66 134 71 47% Net Debt 238 326 138 134 3% Adjusted Net debt 751 819 562 607 8% Total Debt 776 746 588 618 5% Equity 853 753 786 692 12% Ratios 2010 2011 2012 2013 y/y EBITDA margin 5.6 % 3.1 % 7.1 % 4.7 % 2.4% Net debt / EBITDA (book) 2.1x 4.7x 0.8x 1.2x 49% Net debt / EBITDA (adj.) 5.2x 8.1x 2.8x 4.4x 57% FFO / net debt (adj.) 18% 16% 34% 20% 40% Source: Company data, Danske Bank Markets FACTS Sector: Airline, Transportation Corporate ticker: FOY Corp Equity ticker: FIA1S FH Market cap: EUR 341m Equity book value: EUR 691m Ratings: Rating agencies: Not rated Danske Bank Markets: Corporate rating: BB Senior unsecured: BB Analysts: Brian Børsting brbr@danskebank.com +45 45 12 85 19 Mads Rosendal madro@danskebank.com +45 45 14 88 79 Profitability 3,000 2,500 2,000 1,500 1,000 500 0 500 Source: Company data, Danske Bank Markets Leverage 900 800 700 600 500 400 300 200 100 0 2009 2010 2011 2012 2013 Sales EBITDA EBITDAmargin 2009 2010 2011 2012 2013 Source: Company data, Danske Bank Markets 8% 6% 4% 2% 0% 2% 4% Equity Net debt Net debt to EBITDA (rhs) 6 5 4 3 2 1 0 Important disclosures and certifications are contained from page 4 of this report. www.danskeresearch.com
Vague 2014 outlook still strong liquidity position Finnair does not provide a specific guidance for the 2014 result but the company estimates that its turnover will be close to previous year s level in 2014 and that fuel costs are expected to remain high. As the outcome of Finnair s ongoing costsaving negotiations will have a significant impact on the financial performance in 2014, Finnair will not give a precise guidance for the 2014 result before the saving negotiations have been concluded. Finnair estimates capital expenditures for the full year 2014, including advance payments related to fixed assets, to be approximately EUR133m with investments in the fleet representing the majority of this total. Finnair continues to have a strong liquidity position with cash funds of EUR459m at end 2013. In addition to the cash funds Finnair has the option of reborrowing employment pension fund reserves worth approximately EUR430m from its employment pension insurance company. Furthermore Finnair has a committed unused EUR180m credit facility, which matures in July 2016. Finally Finnair has 36 unencumbered aircraft, the balance sheet value of which corresponds to approximately 47% of the value of the entire fleet of EUR1.1bn. Credit summary The 2013 report from Finnair was weaker than expected and this left credit metrics weaker than anticipated. However, we believe the main reasons were related to oneoff incidents i.e. a strike threat that was cancelled so late that Finnair had to rebook passengers/hire additional shortterm staff etc. Furthermore, the airline industry is volatile and capital intensive hence, although we look at the latest development with a negative bias, we continue to see Finnair as a BB rated issuer. However, this is reliant on stronger credit metrics during 2014 despite a relative high capex level guided for the current year. We remain confident about Finnair s longerterm operational competitive advantage due to the geographical location, which enables Finnair as the only European carrier to serve its Asian destinations in a 24hour flight rotation. Furthermore, Finnair has demonstrated strong cost control and continues to be committed to reaching the savings target of EUR200m of which EUR155 has been achieved. Finally, Finnair has a strong liquidity position, a high number of unencumbered aircrafts and is majority owned by AAA rated Finland. As a large part of Finnair s assets are encumbered (56% of the fleet), rating methodology suggests a one notch downgrade on the senior unsecured level. However, due to the significant (56%) and longterm government ownership by the AAArated Finnish state we apply a onenotch uplift, leaving the initial issuer rating unchanged and at the same level as the corporate rating. All in all we maintain our indicative rating of Finnair as a BB rated issuer. See Finnair: Issuer profile, 19 August 2013 for more information. 2 24 February 2014 www.danskeresearch.com
Fixed Income Credit Research Thomas Hovard Head of Credit Research (+45) 45 12 85 05 hova@danskebank.com Louis Landeman TMT, Industrials (+46) 8 568 80524 llan@danskebank.com Åse Haagensen High Yield, Industrials (+47) 22 86 13 22 ha@danskebank.com Mads Rosendal Industrials, Pulp & Paper (+45) 45 14 88 79 madro@danskebank.com Jakob Magnussen Utilities, Energy (+45) 45 12 85 03 jakja@danskebank.com Brian Børsting Industrials (+45) 45 12 85 19 brbr@danskebank.com Lars Holm Financials (+45) 45 12 80 41 laho@danskebank.dk Gabriel Bergin Strategy, Industrials (+46) 8 568 80602 gabe@danskebank.com Kasper From Larsen High Yield, TMT (+45) 45 12 80 47 kasla@danskebank.com Bjørn Kristian Røed Shipping (+47) 85 40 70 72 bred@danskebank.com Nils Henrik Aspeli Real Estate, Industrials (+47) 85408433 nas@danskebank.com Wiveca Swarting Real Estate, Construction (+46) 8 568 80617 wsw@danskebank.com Sondre Dale Stormyr Offshore rigs (+47) 85 40 70 70 sost@danskebank.com Henrik René Andresen Credit Portfolios (+45) 45 13 33 27 hena@danskebank.com Find the latest Credit Research Danske Bank Markets: http://www.danskebank.com/danskemarketsresearch Bloomberg: DNSK<GO> 3 24 February 2014 www.danskeresearch.com
Disclosure This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ( Danske Bank ). The authors of the research report are Brian Børsting, Senior Analyst and Mads Rosendal, Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Danske Bank, its affiliates, subsidiaries and staff may perform services for or solicit business from Finnair and may hold long or short positions in, or otherwise be interested in, the financial instruments mentioned in this research report. The Equity and Corporate Bonds analysts of Danske Bank and undertakings with which the Equity and Corporate Bonds analysts have close links are, however, not permitted to invest in financial instruments that are covered by the relevant Equity or Corporate Bonds analyst or the research sector to which the analyst is linked. Danske Bank, its affiliates and subsidiaries are engaged in commercial banking, securities underwriting, dealing, trading, brokerage, investment management, investment banking, custody and other financial services activities, may be a lender to Finnair and have whatever rights are available to a creditor under applicable law and the applicable loan and credit agreements. At any time, Danske Bank, its affiliates and subsidiaries may have credit or other information regarding Finnair that is not available to or may not be used by the personnel responsible for the preparation of this report, which might affect the analysis and opinions expressed in this research report. As an investment bank, Danske Bank, its affiliates and subsidiaries provide a variety of financial services, including investment banking services. It is possible that Danske Bank and/or its affiliates and/or its subsidiaries might seek to become engaged to provide such services to Finnair in the next three months. Danske Bank has made no agreement with Finnair to write this research report. No parts of this research report have been disclosed to Finnair. No recommendations or opinions have been disclosed to Finnair and no amendments have accordingly been made to the same before dissemination of the research report. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. 4 24 February 2014 www.danskeresearch.com
Expected updates Credit Update: This research report will be updated on a quarterly basis following the quarterly results statements from Finnair. Scandi Handbook: This research report will be updated biannually, usually in April and October. See the front page of this research report for the date of first publication. Recommendation structure Investment recommendations are based on the expected development in the credit profile as well as relative value compared with the sector and peers. As at 31 December 2013 Danske Bank Markets had investment recommendations on 49 corporate bond issuers. The distribution of recommendations is represented in the distribution of recommendations column below. The proportion of issuers corresponding to each of the recommendation categories above to which Danske Bank provided investment banking services in the previous 12 months ending 31 December 2013 is shown below. Rating Anticipated performance Time horizon Distribution of recommendations Investment banking relationships Buy Outperformance relative to peer group 3 months 31% 27% Hold Performance in line with peer group 3 months 47% 26% Sell Underperformance relative to peer group 3 months 22% 9% Changes in recommendation within past 12 months: Date New recommendation Old recommendation 31 December 2013 No Change N/A General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change, and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. This research report is not intended for retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. 5 24 February 2014 www.danskeresearch.com
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