International Consolidated Airlines Group SA - Strong balance sheet with adequate liquidity

International Consolidated Airlines Group SA (LON: IAG) is a FTSE 100-listed airline Company, headquartered in London, United Kingdom.

On 30 October 2020, the Company will announce the Q3 results.

Rationale for Valuation – Buy at GBX 127.83

• In the last month, the Company has delivered a positive return of ~6.52%, which was higher as compared to the FTSE 100 Index.
• From the technical standpoint, 14-day RSI stood at ~37.21, which is supporting the upside movement.
• With the gradual lockdown easing, airlines were permitted to operate for domestic and international routes. This will help to scale up the business operations to some extent.

Key Risks

• Fluctuations in exchange rates and increased volatility in fuel prices could impact the profitability and balance sheet position.
• The aviation sector has been beaten down quite drastically as the majority of aircraft were grounded, due to prolonged lockdown amid covid-19 pandemic.

Recent News

On 14 September 2020, the Company announced the appointment of a new director, namely Luis Gallego, Giles Agutter and Robin Phillips.

On 14 September 2020, the Company announced that the Subscription Rights had been admitted to trading on the Main Market of the London Stock Exchange (LSE) and to listing on the standard segment of the Official List. This was further to the announcement on 10 September 2020, i.e. IAG has launched a steeply discounted €2.74 billion rights issue to boost the finances through the disruption caused by COVID-19. The Company now intends to cancel the trading of the Subscription Rights in the form of CDI Rights on the Main Market of the LSE and the listing of the Subscription Rights in the form of CDI Rights on the standard segment of the Official List. It was anticipated that the Cancellation would take effect on 28 September 2020.

Financial Highlights (for the six months to 30 June 2020 (H1 FY20), as on 31 July 2020)

(Source: Company Website)

• The Company witnessed a strong balance sheet with adequate liquidity to tackle the situation and have access to facilities from the UK & Spanish Governments and extended RCF (Revolving Credit Facility) to boost liquidity.
• Overall results for H1 FY20 were significantly impacted from COVID-19 outbreak, which had a devastating impact on the travel sectors and global airline.
• The Company showed a decline in financial performance in the first half of the financial year 2020. Most of the Aircraft in Q2 FY2020 were grounded; hence, the passenger capacity declined significantly.
• In Q2 FY20, IAG operated 1,875 cargo-only flights using passenger aircraft, which was an important cash contributor to the Group.

One Year Share Price Chart

Daily Chart as of 16 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Conclusion

The Board expects that it will take until at least 2023 for passenger demand to recover to 2019 levels. The Company believes that demand would be recovered when government restrictions are lifted. Further, Qatar Airway has committed to supporting the proposed capital raising, which will enhance the Group’s resilience, balance sheet and liquidity position. IAG continues to take action to strengthen the balance sheet and liquidity position, with reduction in capital spending. On 31 August 2020, the Group had a total liquidity of €7.6 billion, with €5.8 billion of cash, cash equivalents and interest-bearing deposits and €1.8 billion of undrawn and committed general and aircraft facilities.  Overall, the Company appears to be attractive, and once restrictions are lifted, IAG should return to growth. The stock made a 52-week low and high of GBX 102.73 and GBX 453.06, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on International Consolidated Airlines Group at the current market price of GBX 127.83 (as on 16 September 2020, before the market close at 1:38 PM GMT+1), with lower double-digit upside potential based on 2.00x EV/NTM Sales (approx.) on FY20E sales (approx.).

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

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

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