Deutsche Lufthansa: Upside Ahead

Core Insights - Deutsche Lufthansa AG is one of the largest players in the global aviation industry, with a strong position in the EU market, operating multiple airlines and divisions including Lufthansa Technik and Cargo [1][2] - The company is viewed as an attractive investment opportunity due to a positive demand trajectory post-COVID-19, an agreement with the pilot union, and a strengthened balance sheet allowing for dividend payments [1][2] Industry Overview - The EU aviation industry is experiencing production challenges from Boeing and Airbus, leading to capacity constraints and labor shortages, which may limit new entrants and promote rational competitive behavior [2] - The consolidation trend observed in the US airline industry is expected to extend to Europe, enhancing the investability of companies like Lufthansa [2] Company Performance - Approximately 60% of Lufthansa's EBIT is derived from airline transportation, with over 30% from the Technik division and less than 10% from cargo [2] - The Technik division, the largest MRO provider globally, has shown stable profitability with a growth rate exceeding 6% over the last decade, despite a lower adjusted EBIT margin of 10.8% in Q2 [2][3] - Q2 2024 results showed a net profit of €469 million, a 47% decrease from €881 million in Q2 2023, attributed to ticket price normalization, although revenues increased by 7% due to higher capacity and MRO performance [3][5] Financial Outlook - The company expects adjusted core operating profit for 2024 to be in the range of €1.4 to €1.8 billion, with a single-digit percentage decline in Q3 earnings compared to 2023 [3][6] - Despite ongoing challenges, the company is projected to achieve a positive trajectory in 2025, with a focus on optimizing operations and reducing costs [3][4] Valuation - Deutsche Lufthansa is currently trading at a forward EV/EBITDA of 3.3x, below its historical range of 3.6x to 7x, indicating a potentially undervalued position [4] - The estimated enterprise value is €17.55 billion, with an equity value of €9.45 billion, suggesting a potential capital appreciation of 35% [4]