Share in Focus: IAG

Background OF IAG:

International Consolidated Airlines is an airline company that holds the interests in airline and ancillary operations. Its segments include British Airways, Iberia, Vueling, Aer Lingus and Other Group companies. It combines the airlines in the United Kingdom, Spain and Ireland. It has approximately 550 aircrafts to over 280 destinations. The Company, through its subsidiaries, is engaged in providing airline marketing, airline operations, insurance, aircraft maintenance, storage and custody services, air freight operations and cargo transport services. The Company offers its services in cities, including London, Madrid, Barcelona, Rome and Dublin. The Company's brands include British Airways, Iberia, Vueling, Aer Lingus, IAG Cargo and Avios.

IAG  Report February 2019:

International Consolidated Airlines has reported adjusted operating profit of EUR3.2bn, broadly in line with prior market expectations. That represents growth of 9.5%, despite a EUR 129m foreign exchange headwind. The proposed final dividend is EUR 0.165 per share, with a special dividend of EUR 0.35 also announced. Revenue per available seat kilometre rose 2.4% at constant exchange rates, as yields (a measure of pricing) increased 1.5% and load factor (which indicates how full the average plane was) rose 0.7 percentage points to 83.3. IAG's adjusted non-fuel unit costs for the year fell 0.8% to EUR 4.89 per available seat kilometre. However, adjusted operating costs rose 6.3% as fuel costs rose 14.6% to EUR 5.3bn. Net debt rose 7.7% to EUR8.4bn, on account of extra long-term borrowings and capital expenditure to fund the fleet expansion. Adjusted net debt to EBITDAR (earnings before interest, tax, depreciation, amortisation and rental costs) increased from 1.5 to 1.6 times. Looking ahead, IAG expects revenue per available seat kilometre to improve, but costs looks set to increase despite forecasts for flat non-fuel unit costs. That leads IAG to anticipate 2019 adjusted operating profit to be in line with 2018.

Broker Forecasts

Barclays capital has an OVERWEIGHT rating on the stock with a reiterated target price of 700p. Deutsche bank have a BUY rating on the stock with a price target of 675p. RBC Capital Markets have given an OUTPERFORM rating with a target price of 650p.

Dividend

IAG are going ex-dividend on July 4th paying an impressive €0.515 per share, this is the equivalent to approximately 8.30% at time of writing. This includes the final and special dividend.

Opinion

The airline sector has experienced an uncertain period in the last few years. Companies such as British Airways owner IAG have experienced weak consumer demand as well as higher fuel costs. Alongside this, there has been considerable Brexit uncertainty regarding the European airline industry, which may have caused increased caution from investors. As a result of this, the company’s shares have fallen by 15% in the last year. Despite its uncertain prospects, though, IAG is forecast to post a rise in earnings of 6% in the current year. Since it trades on a price-to-earnings growth (PEG) ratio of 1, it seems to offer a wide margin of safety in case of further disruption. With the stock having a dividend yield of 6% from a shareholder pay-out that is covered 3.8 times by profit, it appears to have a high and sustainable dividend. Therefore, while not the most resilient business due to the cyclicality of the airline industry, IAG could offer long-term income and value investing appeal. Click to download the full IAG Forecast & Share Report.