Shares of Air France-KLM rose roughly 2% in early trading in Paris after broker Kepler Cheuvreux changed its view on the carrier, moving its recommendation to Hold from Reduce. Kepler said the stock has reached its price target of €11.50 and is now fairly valued.
The broker had downgraded the airline about a month earlier, arguing at the time that the share price looked "somewhat ambitious" after the start of the Iran crisis. Since that downgrade, Air France-KLM's shares have fallen around 12%, bringing the market price into line with Kepler's valuation, the firm noted.
"Absent a material escalation in the Iran crisis, we believe the current share price accurately reflects the company’s business prospects," Kepler analysts said.
Kepler also revised its financial model in the wake of Air France-KLM's second-quarter results. The broker raised its current-year profit forecasts by 20% while making only about a 1% adjustment to mid-term estimates. Kepler attributed the stronger near-term outlook largely to a more moderate fuel price assumption. Even after the changes, the broker's estimates remain modestly below Visible Alpha consensus by a low- to mid-single-digit percentage.
The rating change followed second-quarter results that beat consensus. Air France-KLM reported adjusted operating profit of €484 million, down from €736 million a year earlier but above the €327 million consensus figure from analysts polled by the company. The results therefore outperformed expectations despite the year-on-year decline in operating profit.
Alongside the quarterly figures, the Franco-Dutch carrier trimmed its full-year capacity guidance. The company now expects a 1% decline in short- and medium-haul flights, while projecting group-wide capacity growth of between 2% and 3%. This represents the second downward revision to its outlook; prior to the outbreak of the Middle East conflict in February, the airline had been forecasting 3% to 5% growth.
Airlines globally have been navigating months of elevated jet fuel costs and have implemented capacity cuts linked to the Iran war. Many carriers pushed to capture a more lucrative summer travel season to strengthen finances before what managements expect to be a more challenging second half of the year.
KLM Chief Executive Marjan Rintel warned that global uncertainty, rising costs and increased competition will remain structural challenges for the airline, and said the Iran war adds to existing pressures on the carrier's finances.
Market context
- Kepler's upgrade to Hold reflects a view that the current share price matches the broker's valuation after recent share declines.
- Near-term profit forecasts were upgraded significantly, driven mainly by a more moderate fuel price outlook.
- Operationally, the carrier reduced capacity guidance for short- and medium-haul flights while keeping modest group-wide growth expectations for the year.