VALUATION OF NORWEGIAN AIR SHUTTLE ASA Master’s Thesis Copenhagen Business School MSc EBA: Finance and Strategic Management Author: Supervisor: Trond Sundquist Jens Borges Student Number: 107008 Characters (incl. spacing): 181,991 Standard Pages: 80 Date of submission: 15.05.2018 Table of Contents 1. Executive Summary .......................................................................................................................... 4 2. Introduction ...................................................................................................................................... 5 2.1 Research Question ........................................................................................................................ 6 2.2 Methodology................................................................................................................................. 7 2.2.1 Data Collection and Validity ................................................................................................. 7 2.2.2 Thesis Structure ..................................................................................................................... 7 2.2.3 Delimitation ........................................................................................................................... 8 3. Norwegian Air Shuttle ASA............................................................................................................. 9 3.1 Company Overview ...................................................................................................................... 9 3.2 Vision, Strategy and Business Model ........................................................................................... 9 3.3 Organizational Structure ............................................................................................................. 10 3.4 Ownership Structure ................................................................................................................... 11 3.5 Share Performance ...................................................................................................................... 11 3.6 Competitive Environment – Peer Group .................................................................................... 12 4. Strategic Analysis ........................................................................................................................... 14 4.1 Macro-Environmental Analysis – PESTLE................................................................................ 14 4.1.1 Political and Legal Factors .................................................................................................. 14 4.1.2 Economic Factors ................................................................................................................ 16 4.1.3 Social ................................................................................................................................... 18 4.1.4 Technological ...................................................................................................................... 19 4.1.5 Environmental ..................................................................................................................... 19 4.2 Micro-Environmental Analysis – Porter’s Five Forces .............................................................. 20 4.2.1 Threat of New Entrants ........................................................................................................ 20 4.2.2 Threat of Substitutes ............................................................................................................ 21 1 4.2.3 Rivalry Among Competitors ............................................................................................... 23 4.2.4 Bargaining Power of Suppliers ............................................................................................ 24 4.2.5 Bargaining Power of Buyers ................................................................................................ 25 4.2.6 Overview of the Five Forces ............................................................................................... 25 4.3 Organizational Analysis – VRIO ................................................................................................ 26 4.3.1 Brand Name ......................................................................................................................... 26 4.3.2 Modern Fleet of Aircrafts .................................................................................................... 27 4.3.3 No-Frills Long-Haul Strategy .............................................................................................. 28 4.3.4 Overview and Competitive Advantage ................................................................................ 29 5. Financial Analysis ........................................................................................................................... 30 5.1 Quality of Data and Financial Statements .................................................................................. 30 5.2 Analytical Statements ................................................................................................................. 30 5.2.1 Analytical Income Statement ............................................................................................... 30 5.2.2 Analytical Balance Sheet ..................................................................................................... 32 5.3 Profitability Analysis .................................................................................................................. 33 5.3.1 Return on Invested Capital .................................................................................................. 33 5.3.2 Industry-Specific Ratios ...................................................................................................... 35 5.3.3 EBIT-Margin Decomposition .............................................................................................. 37 5.4 Liquidity and Solvency Risk Analysis ....................................................................................... 41 5.4.1 Liquidity Risk ...................................................................................................................... 41 5.4.2 Solvency Risk ...................................................................................................................... 42 5.4.3 Liquidity Efficiency ............................................................................................................. 44 5.4.4 Risk of default ..................................................................................................................... 45 5.5 Financial Analysis in Perspective ............................................................................................... 48 5.6 SWOT ......................................................................................................................................... 48 6. Estimating Cost of Capital ............................................................................................................. 49 6.1 Capital Structure ......................................................................................................................... 49 6.2 Cost of Equity ............................................................................................................................. 50 2 6.3 Beta ............................................................................................................................................. 51 6.4 Cost of Debt ................................................................................................................................ 54 6.5 Estimating WACC ...................................................................................................................... 55 7. Forecasting ...................................................................................................................................... 56 7.1 Pro Forma: Income Statement .................................................................................................... 56 7.1.1 ASK and Fleet Growth ........................................................................................................ 57 7.1.2 Revenues .............................................................................................................................. 58 7.1.3 Operating Expenses ............................................................................................................. 60 7.2 Pro Forma: Balance Sheet .......................................................................................................... 65 7.2.1 Net Working Capital ............................................................................................................ 65 7.2.2 Tangible Assets.................................................................................................................... 66 7.2.3 Intangible Assets.................................................................................................................. 67 7.2.4 Net Interest-Bearing Debt .................................................................................................... 67 8. Valuation ......................................................................................................................................... 68 8.1 Valuation Methods ....................................................................................................................