International Consolidated Airlines Group SA

International Consolidated Airlines Group SA (LON: IAG) provides airlines in the UK, Ireland, and Spain, with a fleet of around 533 aircraft and carries nearly 118 million passengers each year.

On 30 July 2021, IAG expects to release its half-yearly results.

Rationale for Valuation – Expensive at GBX 199.93

• The passenger revenue per available seat kilometres declined over 47% in Q1 FY21 against Q1 FY20, which aggravated the operating losses.
• The new bond issue will certainly provide extra resources to take benefit from the recovery. However, it will also increase the leverage and debt pressure.
• The passenger capacity remained subdued, which would delay the financial recovery.
• In terms of valuation multiples - EV/Sales, EV/EBITDA, and Price/Cash Flow multiples are suggesting an overvalued position against the Passenger Transportation Services Industry.
• From a technical standpoint, 21-period SMA (GBX 203.82) sustaining above the current market price and indicating a bearish trend in the stock.

Key Risks

• Passenger demand is unlikely to reach the 2019 level until at least 2023, which can worsen the financial conditions of the Company.
• The volatile commodity fuel prices, unfavourable exchange rates, reduction in available seat kilometres and liquidity crunch can restrict the IAG’s growth trajectory.

Recent News

11 May 2021: IAG announced the launch of convertible bonds for approximately EUR 800,000,000 due 2028 to bolster its liquidity by increasing funding and reducing capital requirements. The final terms of the bonds will take place on 18 May 2021. 

Financial Highlights for the three months to 31 March 2021 (as on 7 May 2021)

 (Source: Company Website)

• During Q1 FY21, passenger capacity was merely 19.6% of Q1 FY19 level due to government restrictions to curb the Covid-19 pandemic.
• The Company took various financial initiatives to strengthen liquidity, while the cash operating costs per week reduced to €175 million in Q1 FY21.
• The operating loss in Q1 FY21 stood at €1,068 million (Q1 FY20: operating loss €1,860 million).
• As of 31 March 2021, total liquidity was €10.5 billion, comprising €8.0 billion in cash and €2.5 billion of committed and undrawn general and aircraft facilities.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative) 

Conclusion

Amid heightened level of Covid-19 uncertainties and travel restrictions, IAG abstained to provide any profit guidance for FY21. Meanwhile, the Company has been focusing on reducing cost base and boosting liquidity to weather the uncertain period. Adjacently, limited passenger schedule and volatile fuel prices can significantly impact the financial conditions. Therefore, it is prudent to avoid fresh positions. The stock made a 52-week high and low of GBX 239.38 and GBX 86.54, respectively.

Considering the operating losses, subdued passenger volume, poor financial health and valuation as done using the above method, we have given an “Expensive” stance on International Consolidated Airlines Group SA at the current market price of GBX 199.93 (as on 11 May 2021, at 8.20 AM GMT), while we look forward to reinvesting when the due price corrections are done and there is a recovery in the passenger volume.

Polar Capital Technology Trust

Since its launch in 1996, Polar Capital Technology Trust (LON: PCT) provides investment opportunities in a diversified portfolio of technology entities. As of 31 March 2021, around 68% of portfolio exposure was focused on US and Canada region.

In mid-July 2021, PCT expects to unveil its full-year results for FY21.

Investment Highlights – Expensive at GBX 2,096.00

• The latest available financial results are more than six months older, and thus, there is ambiguity regarding the current financial position of the Company.
• The state of the global equity market is uncertain amid a weaker macroeconomic backdrop.
• From a technical standpoint, 21-period SMA (GBX 2,314) sustaining above the current market price and indicating a bearish trend in the stock.
• Over the past month, PCT’s stock price has fallen over 9%, whereas the benchmark FTSE 250 index has shown a bullish trend.

Key Risks

• The portfolio performance is at risk with restrictions associated with travel guidelines, COVID-related business disruption, higher inflation, and elevated equity valuations.
• Greater regulatory scrutiny can also limit the growth of the technology sector.

Recent News

10 May 2021: PCT’s unaudited net asset value per share was 2,402.80 pence at the close of business on 7 May 2021, in accordance with the AIC formula.

Financial Highlights for the six months to 31 October 2020 (as on 11 December 2020)

 (Source: Company Website)

• During H1 FY21, there was an improvement in total income, earnings per share and net asset value.
• As of 31 October 2020, cash and cash equivalents was over £251 million, reflecting a better financial position than at the end of H1 FY20.
• PCT did not declare any interim dividend for the period ended 31 October 2020.
• The performance of the technology sector clearly outpaced the broader markets during H1 FY21.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

Conclusion

The remarkable acceleration in technology adoption during H1 FY21 supported the financials of PCT as internet entities benefitted from the Covid-19 crisis. However, increased regulatory scrutiny, travel restrictions, weaker IT budgets, weaker macroeconomic backdrop, and shortage of semiconductors can impact the portfolio performance and liquidity position in the short term. The stock is already trading above the 52-week mid-level while there is uncertainty regarding the full-year performance. Therefore, it is rational to avoid taking fresh positions. The stock made a 52-week high and low of GBX 2,445.00 and GBX 1,771.45, respectively.

Considering the market outlook, portfolio risks, and increased regulatory scrutiny, we have given an “Expensive” recommendation on Polar Capital Technology Trust at the current price of GBX 2,096.00 (as on 11 May 2021, at 8:30 AM GMT), while we look forward to reviewing the FY21 results.

*All forecasted figures and Industry Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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