DLAKF - Lufthansa Is Back To Profitable Growth

2023-03-14 08:43:58 ET

Summary

• The German company is close to acquiring 40% of ITA Airways.
• New CAPEX investments, new hiring, and key managers (CEO and CFO) confirmed.
• With one year ahead, Lufthansa increased its target plan. Positive news, but the valuation is fair. Our equal weight rating is then confirmed.

After analyzing the Deutsche Lufthansa ([[DLAKF]]; [[DLAKY]]) annual report, today we are back to comment on the company's latest results and its ITA Airways love story development. Here at the Lab, in 2022, we reported how the new air flight operator born from the Alitalia ashes was previously promised to Air France/KLM and later on to the German flight operator. Our readers know that we were more positive toward Lufthansa thanks to complementary characteristics with the inbound Italian market. This was supported by a multiple hubs structure and outbound traffic with no competition expected but important synergies to realize. Before updating our readers on the latest rumors, it is key to report Lufthansa's Q4 results.

In our last publication, we explained that we were 1) " expecting better Q4 results compared to the 2019 same period (before the pandemic outbreaks)", 2) "continuing to value the company based on long-term projections of an EBIT of 7.5% and a WACC of 9%" and also " worried about the 2023 EU economic slowdown".

Looking at the company's press release , we can say that Lufthansa is back on track. In just one year, the company achieved an unprecedented financial turnaround. With an operating profit of €1.5 billion and a much better result than expected. According to the CEO, in 2023 air travel demand will remain high. Here is the key financials summary:

1. The company almost double its top-line sale to €32.8 billion from the previous year at €16.8 billion;
2. The adj. operating profit reached €1.5 billion from a minus €1.7 billion;
3. Net income stood at €791 million from a minus €2.2 billion;
4. In the last year, the Lufthansa Group welcomed more than 102 million passengers on board (more than double the figure in 2021) and as a result of the sharp increase in air travel demand, flight numbers have been significantly expanded;
5. The passenger company's capacity reached 72% compared to the pre-COVID-19 crisis, and it steadily grew from the Q1 2022 capacity at 57%. At the group level, the group's aircraft occupancy rate stood at 79.8% thanks to the freight transport division (here at the Lab, we are supported on this trend ) and in detail, Lufthansa Cargo's reached 136% capacity from pre-COVID-19;
6. More important to note is the fact that Lufthansa has merged its flights, making many people travel with a still relatively limited number of take-offs. This has made it possible to contain operating costs and reached a solid EBIT number;
7. And related to point 6), adjusted free cash flow reached an all-time high of €2.5 billion and improved significantly on a yearly comparison (in 2021, Lufthansa recorded a minus €1 billion).

Source: Deutsche Lufthansa Q4 and Fiscal Year 2022 results presentation

These results were achieved despite inflationary pressure that weighs on all costs, starting with fuel. As a non-low-cost operator on passenger numbers, Lufthansa is the European leader, and on the latest revenue line basis, it ranked as the number four operator at the Worldwide level . Aside from that, based on its new investment projections, the German operator is likely to further increase its market share thanks to three fundamental guidelines: 1) service quality (as demonstrated by the "Suite Plus" arriving in the First and Business classes of the Airbus 350 - figure below), 2) digital evolution, and 3) environment respect.

To improve the passenger experience both at airports and in the air, Lufthansa is hiring an additional 4,500 people. 3,000 to strengthen flight personnel and another 1,500 on the ground. In this positive atmosphere, the Lufthansa group confirmed the managing director Spohr in the CEO position. Spohr is on course to become one of the longest-serving CEOs in civil aviation history, having taken command of Lufthansa in 2014. Chief Financial Officer Remco Steenbergen will also be extended in the position for another five years.

The German giant also decided to invest €7.5 billion to purchase another 22 latest-generation aircraft from the American Boeing and also from Airbus. These new fleet modernization will accelerate the achievement of the 2030 company's target emissions.

Looking at Lufthansa's press release, the company also refers to ITA Airways' investment, which will lead it to gain control with a minority stake, initially at 40%. In this regard, the German giant was very cautious and - in its note - generically speaks of a " potential investment ". However, during the press conference held in Frankfurt, Lufthansa was more explicit. CEO Spohr underlined the strong demand for flights from Italy, even from managers returning to travel for business. In this " strategic market for us ", the German group is certain to bring ITA Airways back to profitability in the course of " a very few years " (as already did for the Brussels Airlines corporation). The profit will be the effect of " important synergies "; however, as already mentioned, despite being in favor of the deal, we are assigning zero value to this potential transaction.

Conclusion and Valuation

Lufthansa expects a solid air ticket demand in 2023 and a positive projection for Easter and 2023 summer vacation periods. The company is safer than the pre-COVID-19 level and has decided to maintain a liquidity range between €8 to €10 billion to better protect itself against future crises. Lufthansa also announced its objective to achieve a structural cost savings target of €3.5 billion by 2024 with 90% already completed in 2023. Updating the company's latest projection on capacity, and still valuing Lufthansa based on long-term projections of an EBIT of 7.5% and a WACC of 9%, we decided to maintain our hold position at a target price of €11 per share.

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