Valuation of Icelandair

Kári Gunnarsson

Student thesis: Master thesis


In this thesis the value of Icelandair is estimated and the stock price on April 8th 2016 is challenged. The valuation was performed using the Residual Operating Income (ReOI) model risk adjusted with the Adjusted Present Value (APV) method. The valuation relied on both a strategic and financial analysis of Icelandair and the airline industry. The strategic analysis was carried out using the PESTEL, Porter’s Five Forces and VRIO models. The strategic analysis identified key value drivers for Icelandair, as well as determining potential risks and opportunities the company might face. The company’s financial statements were reformulated to separate the value creating operations from the financing part of business and then analyzed using a trend, common-size and profitability analysis. The information from the analysis was used to forecast the value drivers in the ReOI model which were then risk adjusted using the APV method, forming the base case valuation. Additionally, two scenarios were valued using the same method to observe a broader value range for better and worse scenarios than presented by the base case. A sensitivity analysis was performed to test the calculated value per share result’s sensitivity to key inputs in the model. The base case valuation showed an estimated value of 26 to 29 ISK per share for Icelandair’s stock. This result suggest that the market is over valuing Icelandair’s equity by 30-40% on April 8th 2016. This result is backed up by a multiple analysis valuation indicating a significant over valuation by the market.

EducationsMSc in Finance and Investments, (Graduate Programme) Final Thesis
Publication date2016
Number of pages125