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Lufthansa Faces Removal from DAX Benchmark After 32 Years

June 04
21:04 2020

(Bloomberg) — Germany’s flag carrier is set to be removed from the country’s benchmark stock index for the first time since the gauge’s inception more than three decades ago, after travel restrictions aimed at stemming the coronavirus pandemic sent the stock plunging.

Shares in Deutsche Lufthansa AG, which this week agreed to a 9 billion-euro ($ 10 billion) state bailout package, have fallen almost 40% this year, giving the airline a market capitalization of about 4.8 billion euros. That makes it the 61st largest German company by market value, while the DAX is reserved for the country’s 30 biggest companies.

Cancellations of almost all Lufthansa flights for weeks “weighed so heavily on the stock that it slid into the fast-exit rank,” Uwe Streich, an index analyst at Landesbank Baden-Wuerttemberg, said by email. While changes to the membership of the DAX are typically only made once a year, companies that suffer heavy losses to their value can be kicked out toward the end of each quarter under the so-called fast exit rule.

The first half has been a tumultuous one for the German carrier, with the pandemic all but halting its business. Its massive size — with operations spanning from catering to maintenance — meant it has bled cash faster than other airlines. The bailout will inflate Lufthansa’s debt and interest payments, and existing shareholdings will be diluted as the government takes a stake. The company said on Wednesday it will slash employee expenses and look at spin-offs to bolster cash flow.

A spokesperson declined to comment on a possible DAX deletion.

More Pessimism

“Implications for Lufthansa’s equity value from the support package, on top of the existing net debt and pension liabilities, are weighing on sentiment,” Goodbody Stockbrokers analyst Nuala McMahon said by email. There are also concerns about the corporate-travel market, which accounted for 50% of passenger revenue, and its strategy for leisure travel because of discount competition, she said.

Two-thirds of analysts covering the carrier recommend clients should sell the stock, while the average price target among those tracked by Bloomberg suggests a 29% drop, in contrast to a 20% gain expected for British Airways parent IAG SA. Lufthansa’s consensus recommendation — a measure translating buy, hold and sell ratings into a number — is also the third-worst for all companies in the Stoxx Europe 600 Index.

The pessimism is mirrored by investor bets of a stock drop that are among the harshest in Europe. The company is currently sold short by eight parties, data collected by Bloomberg shows, the second-highest number in Germany. Short interest in the freely traded stock currently stands at 19%, according to IHS Markit data.

Still, not everyone is as negative on the airline’s prospects. “The company appears to be able to exceed our expectations in terms of liquidity preservation,” Bankhaus Metzler analyst Guido Hoymann wrote in a note Thursday, raising his recommendation to hold from sell. While visibility on the recovery of travel is still low, the management measures announced “seem totally plausible,” and capital expenditure will be reduced significantly, he wrote.

A decision on the DAX’s composition is expected late on Thursday, with the changes coming into effect June 22.

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