NWARF - Norwegian Air Shuttle Stock Remains A Promising Speculative Buy

2023-05-12 15:58:17 ET

Summary

• Norwegian Air Shuttle Q1 2023 results showed strong cost control.
• Company has dialed down on expectations this year.
• Even with reduced earnings this year, I believe the current stock price does not accurately reflect the fundamental performance expected for the year.

Norwegian Air Shuttle ( NWARF ) is one of the companies that seemed to have made its final journey during the pandemic. The pandemic could have pushed the company over the edge, but the reality was that the company was badly managed prior to the pandemic, and it kept growing without creating economies of scale or generating value, or as Ryanair’s ( RYAAY ) CEO said: If you have to sell aircraft to pay the fuel bill for your next flight, you don’t have a sustainable business.

So, the company grew, and it failed to generate value while compounding debt. It actually reminds me a lot of Bombardier ( BDRAF ). Bombardier put itself in significant debt for the development of the C Series, but was never able to benefit, but the company is thriving now. In some way, the pandemic was an unfortunate eye-opener for Norwegian Air Shuttle that it had to do things differently. In this report, I will analyze the Q1 2023 and comment on the stock performance.

Norwegian Air Shuttle Stock: Still An Underperformer But Outperforms Market

What I have been doing in my past coverage of Norwegian is looking at the share price performance. The conclusion I return to quite often is that it's among the bottom performers when it comes to share price development. It does outperform the general markets and the [[JETS]] ETF, but that is about it. Since my last coverage, Air France-KLM stock tanked so the Norwegian Air Shuttle performance is now exceeding that of Air France-KLM, but we're not seeing a strong turnaround in the stock price even though in my view the company’s results are materially improving.

Seasonality Hits Results

When looking at the first quarter results, we should keep in mind that naturally the first quarter of the year is the weakest for many airlines, including Norwegian. So, don’t take these results and project them into the future because that’s a mischaracterization of performance. Revenues doubled year-over-year, which is nice, but this is driven by an easy comp. Less easy was the 143% surge in fuel costs. On a 56% expansion in capacity, costs excluding fuel and leases increased 63% driven by items such as inflation. When we look at scaling capacity as a way to better amortize costs, Norwegian doesn’t seem to be there quite yet. Nevertheless, despite the inflationary cost, its unit costs, which excludes fuels but includes leases, are up only 1%. I do think that if you consider that Q1 is naturally the weakest quarter, that's a very promising unit figure.

From an EBITDAR perspective, the airline did well slashing its loss, and I think Q1 is a quarter you should see as one that's all about keeping those operating losses down because while its capacity is up 56% year-over-year, from Q3 2022 to Q1 2023 the capacity has been cut by almost a third to better match capacity with demand, but you cannot take out all associated costs when you take out capacity.

Norwegian Adjusted Debt Rises

What hurt Norwegian in the past was growing without creating value and compounding the debt for that growth. With that in mind, what I would like to see is debt reduction. Reality is that I'm not seeing that debt decreasing. In fact, it increased from 9.7 NOK billion to 12.7 NOK billion. Is that a problem? No, not really. If we exclude the aircraft financing and lease liabilities, the latter is required to be added to debt per accounting rules, we get to a debt of 3.15 billion NOK which is only 276 NOK million higher compared to last year while its cash position increased by 1.1 billion NOK year-over-year, leading to a lower adjusted net debt position excluding aircraft financing and leases. Moreover, with its cash position, the company can already cover its lease liabilities or its regular debt, and the big difference between now and the growth-hungry Norwegian is that value is being created now. So, the company should be able to service its debt. What I would like to see is for the company to retire its debt prematurely, saving on interest costs.

The year-over-year increase in cash includes 869 million NOK in cash flow from the first quarter, which I think does show the combination of strong cost control and forward booking strength, which is indicative of a strong peak travel season for Norwegian.

Norwegian Air Shuttle Positions For The Future

Stock of Norwegian Air Shuttle is currently trading down slightly despite cutting the operating losses. The reason probably is that the company has dialed back its expectations for the year. The company now targeting a 32.5 billion seat-kilometer production down 4.5% from the 34 billion targeted earlier, and a unit cost reduction of around 5% compared to 5% to 10% that was guided for earlier. As the company adjusts its capacity needs for the fourth quarter, the capacity guide is coming down, while inflation and a weakening NOK put some pressure on the unit cost reduction as well.

I think that overall, the current stock price does not accurately reflect the performance that can be expected for 2023. Perhaps Norwegian Air Shuttle has duped investors too much in the price to be appreciated by the market, but I do believe that based on its enterprise value and forward EBITDA expected the stock should be traded on at least $2.35 per share providing over 120% upside.

Conclusion: Norwegian Air Shuttle Stock, Not The Best, Still Good

My conclusion actually remains unchanged from previous quarters, and that's from a stock price performance perspective: Norwegian Air Shuttle is not the best, and it's extremely sensitive to the off-peak quarters. However, while Norwegian still has to provide itself this year and problems at Copenhagen Airport pose a risk to its operations, I do believe that the current share price does not accurately represent the 2023 prospects for the Nordic low-cost carrier, providing a lot of upsides if the results do indeed materialize.

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