Valuation of Norwegian Air Shuttle ASA

Morten Aleksander Tauland & Markus Kleppe Gjennestad

Student thesis: Master thesis


Purpose of this thesis:
Norwegian Air Shuttle ASA’s strategic direction is to become the first successful long-haul low-cost airline, with a staggering 267 new aircraft on order (current fleet, 99 aircraft) at year-end 2015. Based on this, we will estimate the fair value of Norwegian Air Shuttle ASA per 12.04.2016.
Analytical framework:
We will conduct a strategic analysis to assess the external and internal environment that Norwegian Air Shuttle ASA operates in an extract the key value drivers for change. Then we reformulate our peer groups financial statements (e.g. adjust for operating leases) to perform a profitability and financial strength analysis of our peer group. Our findings to this point will be summarized in a SWOT matrix. After that, we use our findings to create a pro forma income statement and a pro forma balance sheet to construct a pro forma cash flow statement. The final valuation will utilize the pro forma statements in a DCF model to obtain a share price estimate. Finally, we conduct a sensitivity analysis to determine key value drivers’ impact on the share estimate.
Key findings:
The strategic analysis uncovered that the overall airline industry in a historical perspective has destroyed value for its equity investors, which we also found to be evident in Norwegian Air Shuttle ASA history. Possible reasons for this phenomenon were found to be a sum of macro and micro factors. Our findings indicate that airlines are becoming more similar, making it hard to differentiate on other factors than ticket prices (Business Model and Strategy). This was supported by an unprofitable industry structure due to price-sensitive customers and low entry barriers (Five Forces analysis). The airline industry is also highly reactive to macro factors such as oil price and GDP growth (PESTLE-analysis). The profitability analysis showed that Norwegian Air Shuttle ASA is so far underperforming compared to other low-cost carriers, in addition to higher liquidity and insolvency risk. Our DCF valuation indicated a share price of NOK 278, highly sensitive to WACC, fuel and payroll costs. A Monte Carlo Simulation showed the probability of 44 % for a negative equity value. A liquidation value indicated that there would be zero left for the owners in a possible bankruptcy.
DCF model estimated a share price estimate of NOK 278, indicating a downside potential of – 21 %. We conclude with a sell recommendation on Norwegian Air Shuttle ASA per 12.04.2016.

EducationsMSc in Finance and Strategic Management, (Graduate Programme) Final Thesis
Publication date2016
Number of pages172