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Valuation of Icelandair Group Valuation of Icelandair Group USING THE DISCOUNTED CASH FLOW MODEL AND A RELATIVE VALUATION APPROACH. Master’s thesis M.Sc. Economics and Business Administration Applied Economics and Finance Author: Einar Ingi Kristinsson, student number: 107031 Supervisor: Poul Kjær Characters including spaces: 94.621 Number of pages: 83 Date of Submission: 15th of May 2020 ABSTRACT During the past years Iceland has been in most conversations when it comes to holidays. During the crisis Iceland became more popular as it provided more value for tourists as the Icelandic Krona collapsed. In more recent times Iceland has been posted around social media and passenger growth has been steady for the last years. This brings us to Icelandair Group, a firm severely affected by the crisis but bounced back from it. Capital controls in Iceland pushed the pension funds to invest domestically and that raised questions, is Icelandair overvalued in the market? This thesis is based on the Discounted Cash-flow model to forecast the value. The discounted cash flow was largely based on extensive work within the strategic and financial analysis chapters, where the micro and macro environment were analysed through PESTEL analysis and Porters Five Forces for the strategic analysis and the DuPont framework to help finding key figures for forecasting leading to the ROE. According to the Discounted Cash-Flow model we found that the fair price for one share of Icelandair Group stock is valued at 47,07 ISK compared to the market rate of 9,46. According to that the market should be under valuating the share price. The relative valuation method of using EV/EBIDTA gives us the equity value per share of 23,64, a result that correlates with the Discounted Cash-flow method, that the investors are under valuating the stock. It is important to note that these forecasts are not scientific and are largely based on the authors beliefs of future profits. The main conclusion is therefore the market is more pessimistic compared to the author and the author feels like there are great opportunities for growth in the future. 1 TABLE OF CONTENTS 1. INTRODUCTION ........................................................................................................................... 4 1.1. RESEARCH QUESTION ..................................................................................................................... 4 1.2. THESIS FRAMEWORK ...................................................................................................................... 4 1.3. METHODOLOGY ............................................................................................................................ 5 1.4. DISCOUNT RATE ............................................................................................................................ 6 1.5. DATA AND SOURCES ....................................................................................................................... 7 1.6. DELIMITATIONS ............................................................................................................................. 7 2. ABOUT ICELANDAIR GROUP ........................................................................................................ 8 2.1. FOUNDATION AND HISTORY OF ICELANDAIR GROUP .............................................................................. 8 2.2. ICELANDAIR GROUP OWNERSHIP STRUCTURE .................................................................................... 10 2.3. ICELANDAIR STRATEGY .................................................................................................................. 10 3. STRATEGIC ANALYSIS ................................................................................................................ 11 3.1. PORTER’S FIVE FORCES ................................................................................................................. 11 3.2. PESTEL ANALYSIS ....................................................................................................................... 11 4. FINANCIAL ANALYSIS ................................................................................................................. 29 4.1. PEER GROUP .............................................................................................................................. 29 4.2. REORGANIZING THE FINANCIAL STATEMENTS ..................................................................................... 30 4.3. PROFITABILITY ANALYSIS, (USING DUPONT) ...................................................................................... 31 5. VALUATION OF ICELANDAIR GROUP ......................................................................................... 44 5.1. WEIGHTED AVERAGE COST OF CAPITAL (WACC) .............................................................................. 44 5.2. DISCOUNTED CASH FLOW FORECASTING .......................................................................................... 46 5.3. VALUATION ................................................................................................................................ 51 5.4. SENSITIVITY ANALYSIS ................................................................................................................... 52 5.5. RELATIVE CALCULATION ................................................................................................................ 53 6. DISCUSSION AND CONCLUSION ................................................................................................. 54 7. REFERENCES .............................................................................................................................. 56 2 8. APPENDICES .............................................................................................................................. 60 8.1. ...................................................................................................................................................... 82 3 1. INTRODUCTION 1.1. Research Question Iceland has recently recovered from the financial crisis of 2008. To control the crisis the Icelandic government placed a capital control, one of the consequences for that was that investors could not invest abroad and that was especially significant as the Icelandic pension funds were obliged to invest domestically. With a limited number of firms on the Icelandic stock market it raises the question of how inflated the market was and how it has corrected itself after the capital controls were lifted. With an increased competition in Iceland for Icelandair and increasing payroll and fuel expenses we would like to find the fair value for on Icelandair Group share. Therefore this thesis pursues the research question of: “What is the fair value of one Icelandair Group stock, as of the 2nd of January 2019”. 1.2. Thesis Framework To be able to answer our research question we have to systematically analyse Icelandair Group. The first part of the thesis talks about the methodology . The methodology chapter gives us structure and that is where we discuss different methods and types of analysis, how we will use them throughout the thesis and how we gather the data. To be able to fully understand Icelandair and it’s values we will have a comprehensive overview of Icelandair’s history, structure and viewing the units that work within Icelandair Group. To understand how Icelandair operates and to better analyse their market, finding the threats and opportunities and most of all finding what makes Icelandair function and keeps them competitive. After going through the history overview the thesis takes us towards strategic analysis, two different models will be used for the strategic analysis, Porters five forces and PESTEL analysis helping us to understand both the macro and micro environment for Icelandair. After the strategic analysis there comes the financial analysis, where Icelandair Group is compared to a selected peer group of airline companies that operate in the same market and are therefore comparable. In the financial analysis we perform a profitability analysis, where the comparison is done in a structured way, finding what makes Icelandair have a competitive advantage or finding where they have fallen behind, this is done with the DuPont framework. 4 The final part is where we actually get to our research question. Valuating Icelandair Group with the discounted cash flow method. Forecasting in the future and we try to find the fair value of one share of Icelandair Group. 1.3. Methodology The methodology chapter covers and helps us understand the different models that we use throughout this thesis. 1.3.1. Strategic Analysis In the strategic analysis chapter we follow two different models, that is the PESTEL analysis and Porters five forces. 1.3.1.1. PESTEL analysis The PESTEL analysis is used to detect macro factors that may affect a firms cash flow. The PESTEL analysis covers Political, Economical, Sociocultural, Technological and Legal factors Macro factors can affect firms in different ways and therefore it is important to further analyse (Petersen & Plenborg, 2012, p.188-189) 1.3.1.2. Porters five forces Porter focuses on the attractiveness of an industry and illustrates different forces affecting the competiton in an industry (Petersen & Plenborg,2012,p.189). Porter talks about threat of entrants, bargaining power of both buyers and sellers, the threat of a substitute product and all of this mixes into a competitive rivalry. 1.3.2. Financial Analysis
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