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Norwegian Air Shuttle: Grounded by uncertainty – equity downgrade to SELL
ABGSC equity research downgraded the NAS stock to SELL yesterday evening. The coronavirus (COVID-19) creates huge earnings uncertainty for NAS and the industry over the coming months. We have seen several companies cutting guidance and reducing capacity. We have incorporated weaker demand over the next three months before a gradual normalisation. This means we now expect, on average, a 5.5pp load factor decline in March and April, y-o-y, along with softer yields. On the back of this, we now estimate a Q1’20 net profit loss of NOK 2.6bn. Furthermore, assuming zero book gain from selling the announced aircraft (not unlikely, in our view), we estimate a book equity ending Q1’20 of NOK 1.56bn, just above the book equity covenant of NOK 1.5bn. Ending Q2’20, we sees NAS breaching covenants on our numbers. NAS had NOK 3bn in cash ending Q4’19 and the liquidity situation looks very tight on our updated numbers. We estimated 1) a Q1’20 PTP loss of NOK 3.3bn, 2) the delivery of two Dreamliners in Q1’20 (NOK 1bn, assuming 15% equity financed) and 3) NOK ~600m in debt instalments for Q1’20. We do not think the sale of 10 aircraft (NOK 900m in positive CF) is sufficient. Adding further uncertainty to NAS’ cash situation is a potential NOK 856m tax fine related to the ‘13/’14 group reorganisation. On our updated estimate, we have a cash balance ending Q1’20 and Q2’20 of NOK 1.2bn and 0.9bn – too low, in our view. This means we expect NAS to raise new equity. Furthermore, we argue NAS needs to raise close to NOK 3bn if it is to have sufficient cash to meet a challenging market and not find itself in the same situation next year when the EUR 250m bond approaches maturity. Given huge earnings uncertainty, liquidity and covenant risk together with rich valuation, we downgrade to SELL. New TP is NOK 8 (37).
