FINNAIR Transportation/Finland, February 27, 2019 Company update Delivering on Asian strategy Rating HOLD Finnair’s Asian strategy has proven successful and the 14 remaining seven A350s deliveries in 2019-2022E support 12 strategy execution and growth further. Evolution of competition in short-to-mid-term remains a key risk, in our 10 view. We expect earnings to weaken slightly in 2019E and 8 consider valuation as largely fair. We retain “Hold” rating. 6 Price/EUR A350 fleet carries from Asia to Europe via shortest route 4 Finnair’s strategy is based on the geographic location of Helsinki 2 hub, as the shortest route from (North-East) Asia to Europe goes 0 over Helsinki. Finnair is able to serve most Asian routes in 24h 02/14 02/15 02/16 02/17 02/18 02/19 rotations, which enables high utilization rate of planes and Finnair DJ STOXX 600 reduces the need for additional crew. New A350s, 12/19 of which were delivered by the end of 2018, are an essential part of the Share price, EUR (Last trading day’s 8.33 Asian strategy and form the cornerstone of cost management as closing price) they have higher seat capacity, lower maintenance cost and Target price, EUR 8.0 better fuel efficiency vs. the replaced A340s. The remaining seven A350s will be delivered in 2019-2022E, enabling further growth. Latest change in recommendation 13-Nov-17 Latest report on company 18-Feb-18 New A350s enable growth and balance capacity in 2019E Research paid by issuer: Yes For 2019E Finnair guides 10% capacity growth (largely based on No. of shares outstanding, ‘000’s 128,136 new A350s) and revenue growth slightly behind capacity. New No. of shares fully diluted, ‘000’s 128,136 capacity will be mostly put to Asian routes. This should enable Market cap, EURm 1,067 further growth and improve weakened PLFs in European traffic, Free float, % 44.0 as a good part of capacity adds in 2018 was short-haul. Key risks for 2019E are demand and competition: demand could soften Exchange rate EUR/USD 1.138 with economic growth, while competition is expected to increase Reuters code FIA1S.HE in traffic between Europe and Asia and in intra-European traffic. Bloomberg code FIA1S FH Fuel is no longer at record levels, although hedged price should Average daily volume, EURm na. continue to edge up. At present we see adj. EBIT, excl. impact of Next interim report 24-Apr-19 IFRS 16, to weaken slightly in 2019E, assuming steady fuel. Web site www.finnair.com Valuation appears fair - “Hold” reiterated Analyst Joonas Häyhä On our estimates Finnair’s current P/E multiples are 10.8x for E-mail [email protected] 2019E and 9.7x for 2020E, vs. the 3yr historical NTM average of Telephone +358 9 4766 9662 10.1x. On P/B Finnair trades 1.2-1.1x when the EUR 200m hybrid removed from equity, while generating ROCE of 8.8% in FY19E BUY HOLD SELL vs. our WACC of 8.9%. Overall, Finnair’s current valuation appears largely fair to us. We hence retain “Hold” rating with an ex-div TP of EUR 8.0 (7.3). Our TP values Finnair close to par with Finnair’s 3yr historical NTM P/E (10.1x) on our FY19E estimates. KEY FIGURES Sales EBIT EBIT Ptx profit EPS P/E EV/Sales P/CF EV/EBIT DPS EURm EURm % EURm EUR (x) (x) (x) (x) EUR 2017 2,568 170 6.6% 157 0.88 14.6 0.5 4.3 8.2 0.30 2018 2,835 169 6.0% 151 0.84 8.4 0.2 2.4 3.0 0.27 2019E 3,071 159 5.2% 140 0.77 10.8 0.2 3.6 4.7 0.30 2020E 3,211 177 5.5% 154 0.86 9.7 0.2 3.3 4.5 0.35 2021E 3,339 194 5.8% 169 1.05 7.9 0.2 3.0 4.2 0.40 Market cap, EURm 1,067 BV per share 2019E, EUR 8.5 CAGR EPS 2018-21, % 7.7 Net debt 2019E, EURm -325 Price/book 2019E 1.0 CAGR sales 2018-21, % 5.6 Enterprise value, EURm 742 Dividend yield 2019E, % 3.6 ROE 2019E, % 9.4 Total assets 2019E, EURm 3,197 Tax rate 2019E, % 20.0 ROCE 2019E, % 8.8 Goodwill 2019E, EURm 0 Equity ratio 2019E, % 38.1 PEG, P/E 19/CAGR 0.8 All the important disclosures can be found on the last pages of this report. Evli Bank Plc, Aleksanterinkatu 19 A, P.O. Box 1081, FIN-00101 Helsinki, Finland, Tel +358 9 476 690, Fax +358 9 634 382, www.evli.com 1(27) FINNAIR Transportation/Finland, February 27, 2019 Company update Investment Summary Finnair – from Asia to Finnair is a network airline focusing on traffic between Asia and Europe. Passenger traffic Europe accounts for 79% of revenue, cargo traffic for 7%, travel services for 8% and ancillary sales for 6%. Asian and European traffic each contribute 40-45% of passenger revenue. Competitive advantage Finnair’s strategy focuses on the growing traffic between Asia and Europe. The strategy is based on location based on the geographic location of the Helsinki hub: the shortest route from (North- East) Asia to Europe goes over Helsinki. Additionally, the distance between Helsinki and most Asian destinations is such that Finnair is able serve most routes in 24h rotations, which enables high utilization rate of planes and reduces the need for additional crew. The most direct route to Asia is enabled by having Russian overflight rights. Flights through the Siberian corridor from Asia to Europe via Helsinki save ca. 2h on flight time compared to one-stop flights via European hubs and ca. 4h compared to routes via the Middle East. A350 fleet carries from Finnair’s fleet renewal and expansion strategy form the cornerstones of its cost Asia to Europe, enabling management as well as revenue growth. Initially Finnair ordered 19 new Airbus A350 growth planes to replace old A340 models and to expand its Asian long-haul capacity. At the end of 2018 Finnair had 12 A350s operational. Current delivery schedule for the remaining 7 planes is two planes per year in 2019-2021E and one plane in 2022E. During this period the older A330 wide-body planes are expected to remain operational, implying Finnair’s long-haul capacity is set to grow from 20 planes at the end of 2018 to 27 planes in 2022E. Asian traffic nearly Finnair’s strategic goals have included: 1) to double its Asian traffic by 2018 compared to doubled by 2018 vs. 2010 2010 base, 2) to nearly double ancillary revenues by 2020 compared to the 2016 base, and 3) to reach 20 million passengers by 2030, which implies 4% CAGR from 2017. Finnair largely reached its target of doubling its Asian traffic by 2018 compared to 2010 base. Finnair has not yet updated its financial targets to reflect IFRS 16, but even with a clear increase in net debt (IFRS 16 -gearing was approximately 70% in 2018) Finnair’s balance sheet remains healthy, enabling further investments. 2019E – ASK to grow by Finnair had a record year in 2017, but 2018 was two-fold. Still in H1 traffic grew close to 10% driven largely by new or above capacity and lower hedged fuel price supported, but in H2 the earnings trend A350s turned downwards driven by increased fuel price and weaker traffic due to tighter competition. For 2019E Finnair guides 10% capacity growth (largely based on new A350s) and revenue growth slightly behind capacity. New capacity will be mostly put to Asian routes This should enable further growth and improve weakened PLFs in European traffic, as a good part of capacity adds in 2018 was short-haul. Key risks for 2019E are demand and competition: demand could soften with economic growth, while competition is expected to increase in traffic between Europe and Asia and in intra- European traffic. Fuel is no longer at record levels, although hedged price should continue to edge up. At present we see adj. EBIT, excl. impact of IFRS 16, to weaken slightly in 2019E, assuming steady fuel. Valuation looks fair – We approach Finnair’s valuation primarily through valuation multiples. On our estimates “Hold” reiterated Finnair’s current P/E multiples are 10.8x for 2019E and 9.7x for 2020E. During the last 3 years, Finnair’s 12m fwd P/E (on Factset consensus) has averaged 10.1x. On P/B Finnair trades 1.0x and 0.9x in FY19-20E, respectively, or 1.2-1.1x when the EUR 200m hybrid removed from equity, while generating ROCE of 8.8% in FY19-20E vs. our WACC of 8.9%. Overall, Finnair’s current valuation appears largely fair to us. We hence reiterate “Hold” rating with an ex-div TP of EUR 8.0 (7.3). Our TP values the shares close to par with Finnair’s 3yr historical NTM P/E (10.1x) on our FY19E estimates. Our 2019E adj. EBIT estimate is up by 5% since our latest update. Evli Bank Plc, Aleksanterinkatu 19 A, P.O. Box 1081, FIN-00101 Helsinki, Finland, Tel +358 9 476 690, Fax +358 9 634 382, www.evli.com 2(27) FINNAIR Transportation/Finland, February 27, 2019 Company update Company overview Finnair – Finnish network Finnair is a network airline focusing on traffic between Asia and Europe. Passenger traffic airline (ticket sales) accounts for 79% of revenue, cargo traffic for 7%, travel services (package tours) for 8% and ancillary sales (extra services) for %.