Norwegian Air Shuttle Stock: Significant Upside Potential Remains for Recovery (OTCMKTS:NWARF)

In October 2023, I published a purchase review for Norwegian Air ASA Shuttle and the stock has since soared about 70 percent, compared to broader market returns of 20 percent. However, since my last report published in February this year, the share price decreased slightly in a positive market. In this report, I will analyze the first quarter results and assess whether Norwegian Air Shuttle is still worth its Buy rating.

Norwegian Air Shuttle sees losses narrow in first quarter of 2024

First quarter revenue increased by 55% to NOK 6,144 million. This is explained by a 10% capacity expansion, 75% of which is thanks to the new acquisition of Widerøe. Overall, Widerøe added 38% to its revenue, as its revenue per available seat mile is significantly higher than Norwegian. Norwegian, however, also saw its unit revenue increase by NOK 0.63 to NOK 0.73. It should be noted that this is partly due to Easter taking place in March this year rather than April and higher ancillary income.

Total operating costs increased by 41%, driven by an increase in operating expenses of NOK 312 million excluding fuel and other items, by NOK 98 million due to foreign exchange headwinds and by NOK 156 million due to ‘higher depreciation and amortization and approximately the same amount in higher rental costs while fuel costs increased by NOK 64 million. It should be noted that half of the increase in operating expenses excluding fuel and other items is actually due to crew training. As a larger business and preparing for the summer season, it makes sense that these costs are high now.

EBITDAR before other losses or gains showed a change of NOK 551 million, giving Norwegian an EBITDAR margin of 7% for the quarter. At the EBIT level, the company still posted significant losses for the quarter with a loss margin of 12%, but it was still better than the 23% loss margin of the comparable period last year.

Unit costs excluding fuel increased from 0.55 to 0.61 and this is not quite what one would seek when increasing capacity. It’s worth noting, however, that overall, Norwegian is a larger company, but operates at minimal levels during the winter. This means that compared to last year, more activity has remained idle, which has a negative effect on unit costs.

I think overall the addition of Widerøe will bring a nice increase in unit revenue to Norwegian and help move passengers from Norway’s domestic network to Norwegian’s hubs to fly to destinations in Europe. With Easter falling in March rather than April, April bookings are a little lower, but it is important to note that revenue booked from May to August exceeds pre-pandemic levels, providing strong support to the 15% capacity expansion that the airline wants to achieve. during this period.

Norwegian Air Shuttle debt continues to rise

Those who have followed my article on Norwegian or the company itself know that before its restructuring, Norwegian increased its debt and its business without creating value. This is why we monitor borrowing. We do see that borrowing continues to increase. However, there are two things to point out: the growth that Norwegian Air Shuttle is currently executing is much more efficient, while a significant portion of its borrowings are lease debts that are growing as the company grows as well. Its actual debt excluding rental obligations amounts to NOK 4,742 million, compared to NOK 3,765 million a year ago. Half of the increase is due to rental debts and the other half to aircraft financing. Cash and cash equivalents increased by NOK 1.8 billion, so we see year-on-year improvement in net debt without rental debts, which is actually very strong given that the company acquired Widerøe in an all-cash deal.

Norwegian Air Shuttle raises 2023 profit forecast

In Q1, we still saw slight year-over-year capacity growth, which makes sense as Q1 is a very weak quarter for Norwegian as they run minimal schedules. to reduce costs. In the coming quarters, however, we expect double-digit growth, which should bring capacity growth for the full year to 12%. Operating EBIT excluding Widerøe is expected to be between NOK 2.5 billion and NOK 3.2 billion, compared to NOK 2.2 billion a year ago.

So, overall, it appears that Norway is in an efficient growth mode rather than a breakneck growth devoid of any value creation.

Norwegian stocks remain undervalued

Valuing Norwegian Air Shuttle shares can be very tricky. The reason is that its median EV/EBITDA over the last 10 years is significantly higher than what we see today. This is not necessarily a problem, but it is a fact that the company is in a completely different shape today than it was a few years ago. I currently use current EV/EBITDA to value the company, which I believe provides a safe valuation basis. Using this multiple and implementing Norwegian Air Shuttle’s balance sheet data and forward projections, I arrive at a price target of $1.83 for 2024, an upside of 41%.

Conclusion: Norwegian Air Shuttle remains a buy

The first quarter results are not entirely representative for many airlines when looking ahead to the rest of the year and this is even more true for Norwegian. However, we did see some positives as the company was able to cut its losses over the winter, despite being essentially a bigger business than it was a year ago. I think it’s very promising for the rest of the year. What surprises me is that Norwegian is even considering paying a 2024 dividend, payable in 2026, when its last bond matures. This shows great confidence in the future.

Obviously for Norwegian we need to see how robust the market remains and how many deliveries it will get from Boeing to increase its fleet, but overall I like the prudent management strategy, I reiterate my strong rating of purchase and raises my price target by 0.12 cents to $1.83.

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