IAG (LON: IAG) ✈

 

Twitter: @MoPhMarkets

Evening all…

Here is the first of the stock reports, and I want to make it as easy to read as possible, so, any suggestions, leave me a comment below. 

Now let’s get onto what we are here for…

The money! 

No, of course, I’m joking; we hope that will come over time, but let’s move on...

I’ll preface this one by saying I have been invested in IAG for a while, so anywhere that I may sound biased, just ignore it (we all have our biases when our money is invested somewhere, regardless of how shit the investment actually is). 

We are here for the facts, so that’s what I’ll (try to) focus on.

Some of the information I’ve included will be freely available elsewhere, and some will be via subscriptions etc. Think of these reports as information aggregators to help you make better investment decisions...

TL;DR: 

• The company was founded in 2011 after a merger between BA and Iberia

• Solid management, tons of experience

• A strong cash position with debt repayments not due anytime soon

• Wall Street analysts are reasonably bullish, a small amount of insider buying

• The most significant risk is European summer holidays not going ahead due to a terrible EU vaccination programme

• We have a bullish view at current levels

The Company

IAG was formed in January 2011 after a merger agreement between British Airways and Iberia...

The Anglo-Spanish firm now has five airlines under its banner, with only Vueling (2004) and LEVEL (2017) established more recently.

The majority of the airlines have been around a long time and understand how to manage tough times, which, as you will see, shows in their handling of the current downturn. 

IAG is comprised of five airline brands ✈

• British Airways - They fly all over the place, long and short-haul, every continent (minus Antarctica)

• Iberia - From Spain, they mainly fly within Europe but also have routes to the US and South America as well as two Asian countries and South Africa

• Iberia Express - Short haul, European only

• Aer Lingus - Short haul, mainly Europe but also Morocco

• Vueling - Europe, with a couple African and idle East countries

• LEVEL - Only a few routes, Europe only

Ok, so that’s technically six, but Iberia and Iberia Express are essentially the same airlines. 

They are also acquiring Madrid-based Air Europa in a €500 million deal.

Management

Their CEO is Luis Gallego from Spain. He was formerly Iberia’s Chief Executive, restoring it to profitability before Covid. He also launched Iberia Express.

Before that, he was one of the founders of Clickair, a low-cost airline that, until its merger with Vueling, was Europe’s fastest-growing airline…

So he’s been around the block, good to know they have safe hands at the top.

The CFO, Steve Gunning, started with British Airways in 2006 and became IAG CFO in 2019.

Overall their management team has loads of experience in the industry, with most roles filled by people who have been at the company for ages.

Financials

This will be the boring part for most people, and I understand, but it is also an essential part, so I will try and pick out the critical points for you...

Above is a snapshot of IAG's earnings for the full year ended December 31st 2020.

• There was also a pre-tax loss of over €7.8 billion, with revenue plummeting 70% due to Covid.

• Passenger capacity was only 33.5% of 2019, with Q1 2021 forecasted to be only 20% of 2019 capacity.

• Aer Lingus was the worst performer in terms of passenger revenue, down 81%.

The losses are hardly surprising, given the situation, so we need to look at the company's cash burn and how much they have to cover costs...

They have a strong cash position with an estimated total as of the 31st of March 2021 of €10.3 billion, comprised of €7.8 billion cash, cash equivalents and interest-bearing deposits, €1.7 billion undrawn general facilities, including a recently announced facility undrawn, and €0.8 billion committed aircraft financing facilities.

IAG has also cut its cash burn sharply and is estimated to be at €185 million per week in the first quarter of 2021.

While the company has €9.8 billion in net debt, much of it is not due for repayment for several years, and the payment to acquire Air Europa will be deferred until the sixth anniversary of the completion of the acquisition which is expected in the second half of this year.

“Our results reflect the serious impact that COVID-19 has had on our business. We have taken effective action to preserve cash, boost liquidity and reduce our cost base. Despite this crisis, our liquidity remains strong. At 31 December, the Group’s liquidity was €10.3 billion including a successful €2.7 billion capital increase and £2 billion loan commitment from UKEF. This is higher than at the start of the pandemic," said CEO Luis Gallego when the full-year 2020 results were released.

IAG has managed the downturn reasonably well, aggressively cutting costs and boosting liquidity.

The only concern I did note was losses relating to fuel and currency hedges.

Institutional Analysts/Insider Buying

When it comes to Wall Street analysts, they are primarily bullish (positive) on the stock…

Happy days!

As you can see from the picture below, the majority have rated the stock as a buy, but one thing to be aware of is the price targets set. 

Some are below or around the current price, but the majority are around 220p (UK stocks are quoted in pence, so that would be £2.20), which is a potential 9.38%+ upside.

Source: TipRanks.com

Based on 13 Wall Street analysts, 10 have a buy rating, two have a hold, and one has a sell rating with an average price target of 220.83p and a high target of 285p 💷.

Insider buying is always a good indication of managements faith in the company, and at IAG, there has been a couple of ‘informative’ buys from directors in the past week and a few more six months ago…

*As per TipRanks definition, an ‘Informative Buy’ are deliberately made by Insiders, thus donning a vote of confidence in the company. ‘Uninformative Buys’ indicate that an insider is buying/selling shares for reasons that do not necessarily mean confidence in the company

Source: TipRanks.com

Marco Sansavini’s (Vueling CEO) name pops up a couple of times, which gives us a bit of confidence, but there has been nothing of real note, to be honest.

Key Risk

Of course, the critical risk is when international travel will get back on its feet...

Or, in other words, when the f*!ck can we go away!

Countries across the world have been in lockdown or had some form of restrictions for over a year, with most having rules that severely hamper international travel.

If European travel opens up, that should give a massive boost to the company...

However, the vaccine rollout for the EU has hardly gone to plan.

Cases on the continent are rising with France announcing a third lockdown, Spain saying masks have to be worn everywhere (even on the beach), Portugal still under a state of emergency, Greece with a curfew, and Germany extending current restrictions to April 18th...

While most of these countries are open for EU citizens to travel to (some have relaxed restrictions for British tourists), who the hell wants to go to the beach in a mask!?

It isn't looking great for the summer holiday season, and unless vaccinations pick up, there is a real risk that airlines will suffer further. 

If we look across the Atlantic, the US has a ban on anyone entering from the UK, EU, Brazil, China, Iran and South Africa.

British Airways is the most profitable airline on the London to NYC route, generating over $1 billion in revenue from 2018-2019...

And, there is a glimmer of hope, as there have been reports that the US will relax travel restrictions in mid-May.

UK non-essential travel could also be allowed to restart on the 17th of May, although there is no guarantee 😫.

International travel is looking a bit crap at the moment, and it is an enormous risk, with some predicting it won't fully recover until 2022/23.

However, I expect it to recover sooner than that as everyone is desperate for a holiday, but the EU's rise in cases and lack of vaccinations is a real problem.

How We See It Playing Out...

Now you’ve got all the essential info, I’ll give you my view, but feel free to hit the exit here if you've made your mind up…

Of course, I like the stock, otherwise, why would I have invested towards the end of last year.

I don’t know about you, but I am desperate to go on holiday, and I doubt I am the only one, in fact, I would say the majority of people are dying to getaway. 

We live in a globalised world, and it is evident that there is a pent up demand for people to visit family and friends and take holidays after a nightmare of 12 or so months...

My only concern is when we will be allowed...

We have seen they have ample liquidity and have cut costs, but if there is a risk to this summer's holiday season, it would be a significant stumbling block.

However, I am quietly confident, if the EU can get vaccinating, the travel industry in Europe will bounce back stronger than current estimates...

And, with IAG shares currently sitting at 209p, there is a strong chance of a decent run higher back to pre-pandemic levels over the next couple of years.