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Lufthansa’s Fair Value Estimate Lowered to EUR 8.15 to Account for Rights Issue

As a result of the coronavirus downturn the group is embarking on a cost and fleet restructuring program, which will see it emerge as a smaller business. In 2020, the group received a government-backed support package totaling EUR 9 billion, which included an equity stake of 20% by the German government for EUR 306 million. 

As part of the approval process the European Commission required the group to surrender 26 slots at its Frankfurt and Munich hubs to new competitors. Despite the recent EUR 2.1 billion rights issue, the group remains highly indebted, which may require additional capital restructuring if cash flows don’t recover to suitable levels to de-leverage organically. Due to the group’s indebtedness and highly uncertain timing of a recovery in cash flows, there is still a wide range of possible outcomes for the group’s equity value.

Financial Strength

Lufthansa is in a weak financial position due to its high levels of indebtedness. The coronavirus pandemic dealt a heavy blow to the aviation industry, resulting in record losses, cash outflows, and growing debt levels. To bolster liquidity, the group agreed to a EUR 9 billion government support package, which included the German state taking a 20% ownership in the group. Net debt, including pension provisions of EUR 7.6 billion, at the end of June 2021 equated to EUR 18 billion. The group has since raised EUR 2.1 billion in equity capital through a rights issue concluded in October 2021, the proceeds of which will be used to repay state aid. The group’s pro-forma net debt and liquidity position after the capital increase is expected to be EUR 16 billion and EUR 7.7 billion, respectively. Despite the capital raise, we believe the group remains highly geared, with a net debt to pre-pandemic EBITDA ratio of 3.5 times, and it will require multiple years of deleveraging to restore the balance sheet to sustainable levels.

Bulls Say’s

  • COVID-19 presents the group with a unique opportunity to structurally lower its cost base and emerge from the crisis with better profitability.
  • The airline has dominant positions at the key European hubs of Frankfurt and Munich, which could be an early beneficiary of a recovery in air travel.
  • Fleet reduction through the retirement of older and less efficient aircraft could lead to a more rational fleet with higher load factors and unit revenue.

Company Profile 

Deutsche Lufthansa is a European airline group. The company operates under the Lufthansa, Swiss Air, Austrian Airlines and Eurowings brands. In 2019, the company carried 145 million passengers to its network of 318 destinations globally. The group’s main airport hubs are Frankfurt, Munich, Vienna and Zurich. The company generated sales of EUR 36.4 billion in 2019.

(Source: Morningstar)

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