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Unformatted text preview: www.exanebnpparibas-equities.com Please refer to important disclosures at the end of this report. Air France-KLM Transport / France Equity Research Report Stock vs Sector Outperform Sector vs Market Outperform EPS revisions 03/07 03/08e 03/09e 03/10e Revised 3.03 3.68 4.36 4.46 Previous 3.03 3.68 4.53 5.21 % change - - (4) (14) Price (19 November 2007) EUR22.9 20 November 2007 Target price EUR40.5 (+77%) Strong globalisation play Network scale offers scope to exploit global growth Air France-KLM, the world&s leading international airline, offers a strong play on globalisation based on increased inter-connectivity between Europe and the emerging economies. It has a unique position among the three network airlines with: 1) a hub at Paris-CDG that has four runways and terminal capacity that will increase significantly by the end of 2008, 2) an aircraft acquisition programme that has already peaked and started to generate strong FCF and 3) a flexible approach to aircraft financing that allows rapid adaptation of capacity at no cost in the event of a downturn in demand. Risks of overpaying for weak airlines are overdone Air France-KLM has the potential to lead further industry consolidation, but it is very sensitive to the importance of value creation, in what is now largely a buyers& market. The recent share price weakness partly reflects investors& concerns about the group overpaying in any possible acquisition of Alitalia or Iberia, but we are confident that management will remain disciplined in its 2009/10e target of a post-tax ROCE of 8.5% (6.5% in 2006/07). Strong upside, reiterate Outperform stance Reflecting higher fuel cost forecasts, partly offset by firmer prices and a positive earnings impact from the Delta transatlantic JV, we have lowered our 2008/09e and 2009/10e EPS estimates by 4% and 14%, respectively, but remain significantly higher than the consensus. We have cut our DCF/SOTP target price to EUR40.5 (formerly EUR46). The substantial 77% upside to our revised target price underpins our Outperform conviction. Nick van den Brul Nick van den Brul London: +44 20 7039 9480 nick.van_den_brul@exanebnpparibas.com Geoff van Klaveren London: +44 20 7039 9484 Market cap./Free float (EURbn) 6.7/5.5 EV (EURbn) 14.5 12-month high/low (EUR) 38.3/22.6 Reuters/Bloomberg AIRF.PA/AF FP DJ STOXX50 3,660.0 Risk rating D Per share data (EUR) 03/07 03/08e 03/09e 03/10e EPS restated 3.03 3.68 4.36 4.46 EPS reported 3.32 4.70 4.24 4.35 EPS (IBES) 3.35 3.45 3.73 3.96 CFPS 9.54 10.41 10.52 10.81 Net dividend 0.48 0.54 0.64 0.74 Stockmarket ratios* 03/07 03/08e 03/09e 03/10e P/E (x) 8.3 6.2 5.3 5.1 P/E rel.DJ STOXX50 (%) 75.1 57.2 51.2 54.5 P/CF (x) 2.6 2.2 2.2 2.1 P/BV (x) 0.9 0.7 0.6 0.6 Net yield (%) 1.9 2.4 2.8 3.2 EV/Sales (x) 0.7 0.6 0.6 0.5 EV/EBITDA (x) 4.2 3.6 3.3 3.1 EV/EBIT (x) 10.1 8.1 6.9 6.3 * Yearly average price for FY ended 03/07 P&L highlights (EURm) 03/07 03/08e 03/09e 03/10e Sales 23,077 24,110 25,403 26,813 Restated EBIT 1,570...
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