International Consolidated Airlines Group (IAG) is among the world’s largest airline group headquartered in London, United Kingdom. In terms of revenue, IAG is Europe’s third and the world’s sixth largest aviation company. The group has 546 aircraft carrying around 105 million passengers to 279 destinations each year. IAG is a market leader in three European countries i.e., Ireland, UK and Spain which enables them to gain the majority of share in the aviation market. In 2017 the company launched a low-cost airline brand called LEVEL and flies from Paris, Barcelona and Vienna.

Key Statistics

 
Key Management Team
Mr William Matthew Walsh: CEO & Executive Director

Mr Enrique Dupuy de Lôme Chávarri: CFO & Executive Director

Top 10 Shareholders

 (Source: Financial Times)
 
Financial Results and Review - FY2018 (€, million)

(Source: Annual Report, Company Website)
 
Financial Commentary – FY2018

The company reported revenue of €24,406 million for the year ending December 2018 as compared to €22,880 million in 2017 for the same period. There was an increase of 6.7 per cent in revenue, due to the steady growth of both passenger revenue and cargo revenue. The company’s reported revenue from passenger business and cargo business stood up by 6.2 per cent and 3.6 per cent respectively as compared to last year. The company’s reported fuel, oil costs & emissions charges had increased by 14.6 per cent due to offset by weaker USD and management efficiencies. The company’s total operating expenditure had increased by 6.3 per cent due to increase in fuel, oil costs, handling and catering charges. The company’s reported operating profit had increased by 9.5 per cent in comparison with the last year mainly due to a strong revenue performance from a better macroeconomic environment. Operating profit had been increased from €2,662 million in FY2017 to €2,950 million in FY2018. The company’s profit before tax increased to €3,487 million in FY2018 as compared to €2,481 million in FY2017. The company’s profit after tax had increased to €2,897 million (2017: €2009 million) in FY2018 due to strong operating profit with higher unit revenues and lower non-fuel costs.

Ratios

(Source: Thomson Reuters)

Ratios Commentary

Gross margin reported was 67.2 per cent in the first half of the financial year 2018, reflecting a marginal increase of 0.4 per cent when comparedwith last year data. However, the reported margin was relatively higher than the industry median. EBITDA margin of 15.7 per cent for the H1 of FY2018 stood considerably lower than the industry median of 18.8 per cent. Net margin reported was 12.6 per cent for the H1 of FY2018, reflecting an increase of 7.00 per cent when comparedwith last year data. Return on equity stood at 19.4 per cent which was the same as the industry median. On the liquidity front, IAG’s current ratio was lower than the industry median of 1.38, reflecting the insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio was significantly higher as compared to the industry median, reflecting that the company is more leveraged as compared to its peers.  
 

Share Performance 

Daily price chart as on March-05-2019, before market close. (Source: Thomson Reuters)

On March 05^th, 2019, shares of International Consolidated Airlines Group were trading at GBX 574.20, before market close, up by 0.03 per cent against its previous day closing price. Stock’s 52 weeks High and Low is GBX 727.00/GBX 547.00. At the time of writing, shares were trading 21.05 per cent lower than its 52w High and 4.94 per cent higher than its 52w low. International Consolidated Airlines Group share price declined significantly by 5.72 per cent in the last three months (as at March 4, 2019), and in the last one year, the stock has delivered negative 6.67 per cent returns. Stock’s average traded volume for 5 days was 18,210,747.80; 30 days - 7,060,334.67 and 90 days - 5,855,113.74. The average traded volume for 5 days was up by 157.93 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 5.5x as compared to the industry median of 8.5x. The company’s stock beta was 0.66, reflecting lower volatility as compared to the benchmark index. Total outstanding market capitalisation was around £11.40 billion and a dividend yield of 6.44 per cent.

 
Valuation Methodology – 1

EV/Sales Multiple Approach (NTM) (Sales (FY19E) approximately)

 
While valuing International Consolidated Airlines Group Plcon EV/Sales Multiple, we have considered Next Twelve Month (NTM) EV/Sales of its peers, which were Ryanair Holdings Plc(NTM EV/Sales stood at 2.07x), Stagecoach Group Plc(NTM EV/Sales stood at 0.53x), Easyjet PLC(NTM EV/Sales stood at 0.76x), Air France KLM SA(NTM EV/Sales stood at 0.45x), Wizz Air Holdings Plc(NTM EV/Sales stood at 0.65x), and Royal Mail Plc(NTM EV/Sales stood at 0.32x).
 
Valuation Methodology – 2

EV/EBITDA Multiple Approach (NTM)

 
While valuing International Consolidated Airlines Group Plcon EV/EBITDA Multiple, we have considered Next Twelve Month (NTM) EV/EBITDA of its peers, which were Deutsche Lufthansa AG(NTM EV/EBITDA stood at 2.49x), Easyjet PLC(NTM EV/EBITDA stood at 5.56x),Air France KLM SA(NTM EV/EBITDA stood at 2.83x),Royal Mail Plc(NTM EV/EBITDA stood at 3.49x), and FirstGroup Plc(NTM EV/EBITDA stood at 3.94x).
 
(Note: All forecasted figures and Peer selection have been taken from the Thomson Reuter. All Euro figures have been converted into GBP; EUR: GBP- 0.864)


Growth Prospects and Risks Assessment

Passenger revenue is expected to show steady growth. The company’s rental revenue has also increased primarily at John F Kennedy airport. The company has increased capacity in all airlines and regions excluding Asia-Pacific. Political uncertainty, fuel price volatility are the major risks that can impact the performance of the business group. The company is impacted by the Brexit and will evaluate and prepare for the changes.

Conclusion
Despite the current trading level indicates the stock movement towards 52-week low but the company has shown good financial performance as compared to the last year. There has been a significant increase in the revenue and the earnings of the company showing the growth of both the top line and bottom-line margins. Based on the strong growth prospects of the company and the valuation done using the above two methods we have given a BUY recommendation with single-digit upside potential (based on 3.6x NTM EV/EBITDA on FY19E EBITDA and 0.6x NTM EV/Sales on FY19E sales).

*The buy recommendation is valid for the current price as covered in the report as on (5th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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