Copenhagen Business School Master THESIS Valuation of Norwegian Air Shuttle ASA Author: Charlotte PAUL 124639 Oda Elise ERIKSSON 124672 Supervisor: Poul KJÆR Programme: MSc Applied Economics and Finance May 15, 2020 Number of standard pages: 89 Number of characters: 162 554 1 Executive Summary The purpose of this paper is to conduct a valuation of Norwegian Air Shuttle ASA to find a fair value of the company. The Norwegian airline is based in Oslo and provided flights for over 36 million passengers in 2019. To date, the company has undergone significant changes in its management and moved its core focus from growth to profitability. Many years of growth and development has increased the size of the company and subsequently led to an increase in debt levels. Moreover, in the last two years, the company has faced numerous challenges related to the grounding of the new Boeing MAX8 aircraft, troubles with Rolls Royce engines on the Dreamliner aircraft, and the global Covid-19 crises. Strategic analysis, consisting of macro, industry and company-level analysis, revealed that consumer demand and the oil price pose a significant threat to the business performance of Norwegian. Moreover, industry analyses revealed that the nature of the aviation industry is highly competitive with a large number of airlines competing for the same customers making it increasingly difficult for Norwegian to turn a profit with a low contribution margin. Rules and regulations from the government also possess a significant impact on Norwegian, this is specifically related to the flight-seat-fine affecting customer demand through increased flight ticket prices. Financial analyses, based on historical figures publicly available and a comparison with two other airlines, revealed that Norwegian has significantly higher growth than competing airlines but this is not displayed in their profitability. The liquidity and profitability numbers highlight Norwegian’s weak business performance historically unlike its competitors. However, Norwegian has in the last year started to improve business performance, moving towards industry average. Strategic and financial analysis, together with up-to-date reports and articles, forms the foundation of forecasting. The present value approach using the DCF method and WACC as a discount rate revealed a share price of 15,76 NOK. The Norwegian shares are according to these analyses undervalued by the 10th of March 2020. 2 Table of Contents 1. Introduction ................................................................................................................... 5 1.2 Problem statement...................................................................................................................6 1.3 Methodology ...........................................................................................................................6 1.3.1 Data Collection ............................................................................................................................................ 6 1.3.2 Design .......................................................................................................................................................... 6 1.3.3 Demarcation ................................................................................................................................................ 7 2. Company & Industry .......................................................................................................... 9 2.1 Company ..................................................................................................................................9 2.1.1 Corporate structure .................................................................................................................................... 11 2.1.2 Fleet ........................................................................................................................................................... 12 2.2 Aviation industry .................................................................................................................... 13 2.2.1 SAS AB ........................................................................................................................................................ 14 2.2.2 Ryanair ....................................................................................................................................................... 15 3. Strategic Analysis............................................................................................................. 16 3.1 PESTEL ................................................................................................................................... 16 3.1.1 Political and legal actors ............................................................................................................................ 16 3.1.2 Economic factors ....................................................................................................................................... 19 3.1.3 Social factors .............................................................................................................................................. 20 3.1.4 Environmental factors ............................................................................................................................... 20 3.1.5 Technological factors ................................................................................................................................. 21 3.2 Porter´s Five Forces ................................................................................................................ 22 3.2.1 Threats of new entrants ............................................................................................................................ 22 3.2.2 Supplier power .......................................................................................................................................... 23 3.2.3 Threat of substitutes ................................................................................................................................. 23 3.2.4 Buyer power .............................................................................................................................................. 24 3.2.5 Industry rivalry ........................................................................................................................................... 24 3.3 Summary................................................................................................................................ 24 4. Financial analysis ............................................................................................................. 26 4.1 Reporting standards ............................................................................................................... 26 4.1.1 IFRS 16 ....................................................................................................................................................... 27 4.2 Presentation of the financial statements ................................................................................. 28 4.3 Reorganization of the financial statements ............................................................................. 32 4.3.1 The reorganized income statement .......................................................................................................... 32 4.3.2 The reorganized balance sheet ................................................................................................................. 35 4.3.3 Special items .............................................................................................................................................. 41 4.3.4 Net operating profit less adjusted taxes (NOPLAT) ................................................................................... 42 4.4 Historical analysis ................................................................................................................... 43 4.4.1 Profitability analysis................................................................................................................................... 43 4.4.2 Growth analysis ......................................................................................................................................... 48 4.4.3 Liquidity risk analysis ................................................................................................................................. 50 3 4.4.4 Summary .................................................................................................................................................... 53 5. Forecasting ...................................................................................................................... 55 5.1 Key figures ............................................................................................................................. 56 5.1.1 Fleet plan ................................................................................................................................................... 56 5.1.2 ASK/RASK ................................................................................................................................................... 57 5.1.3 Growth ....................................................................................................................................................... 57 5.2 Operating revenue ................................................................................................................