Program X And Wideroe Acquisition Will Streamline Operations And Enhance Efficiency

Key Takeaways

• Robust demand from growth in passenger numbers and new corporate travel agreements suggests potential future revenue growth for Norwegian Air Shuttle.
  
• Operational synergies from acquisitions and new platforms, along with cost-reduction programs, could enhance efficiency and profitability.
  
• Operational and financial uncertainties from legal issues, foreign exchange risks, and competition could hinder growth and affect Norwegian Air Shuttle's future revenue and margins.

Catalysts

Provides air travel services in Norway and internationally.

• The growth in passenger numbers and market share in Norway, along with increasing corporate travel agreements, indicates a robust demand for Norwegian Air Shuttle's services, suggesting potential revenue growth in the future.
  
• The acquisition of Wideroe and the resulting operational synergies, as well as the launch of a new distribution platform, are expected to streamline operations and enhance efficiency, potentially improving net margins.
  
• The introduction of Program X, focusing on cost reduction and revenue initiatives, suggests that Norwegian Air Shuttle is committed to enhancing profitability, likely impacting earnings positively in the coming years.
  
• The anticipated positive impact of macroeconomic factors such as potential real wage growth and falling interest rates in Scandinavia could boost travel demand, potentially increasing revenue for Norwegian Air Shuttle.
  
• The favorable outcomes related to fleet management and delivery of new aircraft by Boeing, amidst a market with reduced capacity from competitors due to engine issues, could support stable or improved yields, positively affecting future earnings.

Norwegian Air Shuttle Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Norwegian Air Shuttle's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.4% today to 6.1% in 3 years time.
• Analysts expect earnings to reach NOK 2.6 billion (and earnings per share of NOK 2.26) by about May 2028, up from NOK 1.2 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK3.0 billion in earnings, and the most bearish expecting NOK1.7 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.7x on those 2028 earnings, down from 10.8x today. This future PE is lower than the current PE for the GB Airlines industry at 10.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.34%, as per the Simply Wall St company report.

Norwegian Air Shuttle Future Earnings Per Share Growth

Risks

• Norwegian Air Shuttle’s current challenges with punctuality (78.4%) and regularity (slightly below target) could negatively affect passenger satisfaction and retention, potentially impacting future revenue growth.
  
• The ongoing legal battle over ETS obligations and potential penalties create uncertainty and financial risk, which could affect earnings if resolved unfavorably.
  
• Fluctuations in the value of the Norwegian krone have negatively impacted operating expenses and liabilities, indicating foreign exchange exposure risks that could affect net margins.
  
• Although the company has secured financing for its aircraft orders, uncertainties regarding aircraft deliveries from Boeing and engine issues with Airbus could disrupt fleet expansion plans, impacting operational capacity and revenue potential.
  
• Competition in corporate travel markets remains intense, particularly with SAS’s aggressive pricing strategy, which could affect Norwegian’s ability to maintain or grow corporate travel revenue streams.

Valuation

• The analysts have a consensus price target of NOK14.0 for Norwegian Air Shuttle based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NOK18.1, and the most bearish reporting a price target of just NOK10.9.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK41.8 billion, earnings will come to NOK2.6 billion, and it would be trading on a PE ratio of 6.7x, assuming you use a discount rate of 8.3%.
• Given the current share price of NOK13.62, the analyst price target of NOK14.0 is 2.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.