Overview
International Consolidated Airlines Group SA (IAG) is among the world’s largest airline group headquartered in London, United Kingdom. The group has 573 aircraft carrying around 113 million passengers to 268 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. The company’s brand portfolio includes brands such as Aer Lingus, British Airways, Avios, Iberia, IAG cargo, Vueling and IAGGBS etc. In 2017, the company launched a low-cost airline brand called LEVEL and flies from Paris, Barcelona and Vienna.

The current Chief Executive Officer is Willie Walsh. Enrique Dupuy de Lôme holds the responsibilities of the Chief Financial Officer.

Key Statistics



Top Shareholders

 

Segments Performance

The company divided its operations into 4 reportable segments being Iberia, Aer Lingus, Vueling and British Airways. The company also had two additional segments LEVEL and Avios but due to low quantitative thresholds, they were disclosed separately by the management. In the financial year ending 31^st December 2018, all the four reported segments had shown revenue and operating profit (after exceptional items) growth against the last year data for the same period. The company’s revenue from all the geographic segments which include the UK, Spain, the USA and the rest of the world, had also increased in the financial year 2018.

Trading Update Q1 Financial Year 2019 (€, million)


(Source: Quarterly Report, Company Website)
 
For the first quarter ending 31^st March 2019, the company reported total statutory revenue of €5,318 million against €5,022 million for the same period of the last year. There was an increase of 5.9 per cent in revenue, due to the steady growth of both passenger revenue and other revenue. The company’s reported operating profit (before exceptional items) declined by 51.79 per cent in comparison with the last year mainly due to an increase in the operating and administrative expenses for the period. 

Statutory Operating profit (after exceptional items) declined from €919 million in Q1 FY2018to €135 million in Q1 FY2019. The company’s reported pre-tax profit stood at €86 million in Q1 FY2019 against €885 million in Q1 FY2018. The company’s profit after tax (before exceptional items) decreased by 62.57 per cent to €70 million in Q1 FY2019 against €187 million in Q1 FY2018. The company’s statutory profit after tax and exceptional items stood €70 million in Q1 FY2019 against €794 million in Q1 FY2018. The company’s reported basic EPS stood at €3.7 cents in Q1 FY2019 versus €38.5 centsin Q1 FY2018.

Financial Highlights – Financial Year 2018 (€, million)


(Source: Annual Report, Company Website)
 
For the financial year ending 31^st December 2018, the company reported total revenue of €24,406 million against €22,880 million for the same period of the last year. 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 fuel, oil costs & emissions charges had increased by 14.6 per cent due to higher fuel prices and marginally offset by weaker USD and management efficiencies. 

The company’s reported operating profit (before exceptional items) 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 (after exceptional items) surged from €2,662 million in FY2017 to €3,678 million in FY2018. 

The company’s reported profit before taxation (before exceptional items) stood at €3,039 million in FY2018 against €2,769 million in FY2017.Profit before taxation (after exceptional items) surged from €2,481 million in FY2017 to €3,487 million in FY2018. 

The company’s profit after tax (before exceptional items) increased by 11.2 per cent to €2,481 million in FY2018 against €2,231 million reported in FY2017.

The company’s adjusted EPS had increased to €117.7 cents (2017: €102.2 cents) in FY2018 due to strong operating profit with higher unit revenues and lower non-fuel costs.The company’s Basic EPS had increased to €142.7 cents (2017: €95.2 cents) in FY2018.

Adjusted net debt for the financial year 2018 stood at €8,355 million versus €7,759 million in FY2017.

ROIC remained ahead of the set target of 15 per cent to 16.6 per cent in FY2018 and 15.7 per cent in 2017.

Key Performance Indicators

Net Promoter Score (NPS)

NPS is a non-financial metric used to measure the customer’s loyalty towards a brand. The IAG’s NPS declined by 0.5pts in FY2018. The company launched various upgrades in its products and enhance its service and was well acknowledged by the customers.


ROIC

ROIC is used to assess the returns generated from its invested capital. The company’s ROIC increased by 0.9 points against the last year data.


Lease-adjusted operating margin

Lease-adjusted operating margin is used to measure the efficiency of the business in terms of profitability as well as improvements done in the financial performance. The company’s Lease-adjusted operating margin had improved and was 14.4 per cent which was within the company’s target.

Average growth (ASKs)

Airline’s capacity is measured based on available seat kilometres (ASKs). ASK is the function of a number of seats available for sale and the distance flown. The company’s robust financial performance had helped them to increase the average growth rate.

Average CAPEX

The company track its capex through its planning cycle to achieve the financial targets. The company continuously invested in customer product, IT and infrastructure projects and fleet to improve customer offerings and to remain competitive.

Equity free cash flow


Equity free cash flow is used to identify the cash generated by the business, which is available to return to shareholders, to undertake growth opportunities and to improve leverage. The company’s equity free cash flow stood at €819 million lower than 2017 data at €1,801 million.

Financial Ratios
 

Source: TR
 
The reported gross margin in FY2018 declined by 1 per cent to 67.2 per cent against 68.2 per cent reported last year for the same period. The reported EBITDA margin of 18.7 per cent for the FY2018 stood higher than the industry median of 15.6 per cent. Net margin reported was 11.9 per cent for the financial year 2018, reflecting an increase of 3.1 per cent when comparedwith last year data. Return on equity for the current financial year stood at 43.3 per cent which was significantly higher than the industry median of 22.7 per cent. On the liquidity front, International Consolidated Airlines Group SA’s current ratio was lower than the industry median of 1.07, reflecting insufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the IAG SA’s was 1.12x which was higher as compared to the industry median of 0.79x, reflecting that the company is more leveraged as compared to its peers.  
 
Share Price Performance


Daily Chart as at June-17-19, before the market close (Source: Thomson Reuters)

On June 17, 2019, at the time of writing (before the market close, at 1:44 PM GMT), InternationalConsolidated Airlines Group SA shares were trading at GBX 448.50, down by 2.65 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 727.00/GBX 441.50. At the time of writing, the share was trading 38.31 per cent lower than the 52w High and 1.59 per cent higher than the 52w low. Stock’s average traded volume for 5 days was 5,293,647.20; 30 days – 6,587,295.17 and 90 days – 6,880,629.80. The average traded volume for 5 days was down by 19.64 per cent as compared to 30 days average traded volume. The company’s stock beta was 0.73, reflecting less volatility as compared to the benchmark index. The outstanding market capitalisation was around £9.27 billion, with a dividend yield of 8.79 per cent.

Valuation Methodology
Method 1: Price to Book Value Approach (NTM)
 


Method 2: Price to Cash Flow Approach (NTM)


To compare InternationalConsolidated Airlines Group SA with its peers, Price/Cash Flow multiple has been used. The peers are Ryanair Holdings Plc (NTM Price/Cash Flow was 6.14), Air France KLM SA (NTM Price/Cash Flow was 1.01), Deutsche Lufthansa AG (NTM Price/Cash Flow was 1.84), Royal Mail Plc (NTM Price/Cash Flow was 2.67) and Stagecoach Group Plc (NTM Price/Cash Flow was 3.69). The Average of Price/Cash Flow (NTM) of the company’s peers was 3.00x (approx.)

Growth and Risk Assessments

The company’s 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
IAG has guided that it will be able to achieve at least flat EBIT profitability in 2019, despite headwinds from fuel and investments in both opex and capex around fleet, product and infrastructure initiatives.

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, reflecting favourable top line and bottom-line margins. The company has increased capacity in all the 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’s operations will be impacted by the uncertainty created over Brexit.

Based on decent fundamental prospects and support from the valuation as done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 460.70 (as on 14th June 2019) with high single-digit upside potential based on 1.60x NTM Price/Book Value (approx.) on FY19E book value per share (approx.) and 3.00x NTM Price/Cash Flow (approx.) on FY19E cash flow per share (approx.).
 
*The buy recommendation is valid for the current price as covered in the report (as on 17th June 2019).
*All forecasted figures and Peer information have been taken from Thomson Reuters.Currency exchange rate taken for 1 EUR = 0.89068 GBP.

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