The airline industry affected by the COVID-19 crisis faces extraordinary challenges. Travel restrictions imposed at the end of March 2020 by governments in response to the pandemic outbreak closed down the international aviation affecting 98% of global passenger revenues. As a result of the constantly flowing bad news, investors agreed that the pandemic would lead to decrease in future cash flows and earnings, pushing Deutsche Lufthansa’s share price down to its 5-year low of EUR 7.18 on April 24, 2020. The thesis, therefore, attempted to examine, what is the true value of Lufthansa affected by the COVID-19 crisis on August 6, 2020 and how does it compare to the actual share price influenced by market shocks.
Since the airline industry is vulnerable to global economic downturns, the shutdown measures in response to the pandemic plunging the global economy into a serve contraction significantly affect air demand levels.
Weaker financial position of individuals and businesses, together with falling customer confidence and persisting travel restrictions are expected to significantly minimize airlines’ earnings potential. Although all market forecasts remain highly uncertain, it is believed that the global demand for air travel is not expected to return to pre-pandemic level before 2024. Different scenarios assume, that the upside could see travel demand return to 2019 levels in 2023, while the downside could be much more serve. Given the high level of uncertainty, Lufthansa’s financial statements forecasts were prepared under five different scenarios.
DCFF and EVA models estimations in the base case scenario resulted in a share price of 23.59 EUR, which, compared against the actual price of 8.10 EUR, suggest undervaluation. Undervaluation was further confirmed by the multiples, although the estimation of Lufthansa’s share price at 11.23 EUR was lower compared to the DCFF results. The estimation, however, has to be interpreted with caution, since the outlook remains highly uncertain and forecast were based on various assumptions. It is therefore advised to take different scenarios, which yielded share price estimates ranging between 70.90 EUR to -4.83 EUR, into consideration.
Furthermore, sensitivity analysis showed that the share price obtained from DCFF and EVA valuation models is highly sensitive to WACC, the two biggest cost items and the terminal growth rate changes. Although the final price is set at 23.59 EUR, the outcomes of the scenario and sensitivity analysis emphasise the importance of monitoring future developments of the company and the overall industry before deciding on investing in Lufthansa’s shares, since such investment involves significant risk.
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