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IAG - Decent results, unclear coronavirus impact

Nicholas Hyett, Equity Analyst | 28 February 2020 | A A A
IAG - Decent results, unclear coronavirus impact

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

International Consolidated Airlines CDI

Sell: 228.90 | Buy: 229.30 | Change -17.90 (-7.26%)
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IAG has reported full year revenue up 5.1% to €25.5bn and underlying operating profit down 5.7% to €3.3bn. The drop in profit is mainly due to higher fuel costs.

More recently, the coronavirus outbreak has hurt demand, but its ultimate impact on results for 2020 is unclear. Management have declined to give detailed guidance.

The board has proposed a final dividend of 17 euro cents per share. That brings the full year dividend to 31.5 euro cents per share, up from 31 euro cents last year. This year the board has not proposed a special dividend. .

The shares were down 5.7% in early trading.

View the latest IAG share price and how to deal

Our view

Coronavirus has hit airlines hard. Demand for flights has dropped, particularly on Asian and European routes, and we don't know what the eventual damage will be.

In times like these investors will be thinking hard about the financial strength of the businesses they own. The two key metrics are therefore the amount of money going out the door, and the amount of liquid cash the group has to meet its obligations.

In 2019 IAG's total operating costs were €22.2bn before exceptional items, and we make cash costs something in the region of €60m a day. Technically, IAG had €4,062m of cash and cash equivalents on its balance sheet at the end of the 2019.

Given the group's significant liquidity we don't think coronavirus is a mortal threat to IAG. The short term earnings hit could be ugly though.

But this is part and parcel of investing in airlines. Demand for First and Business class berths turns off and on like a tap as the economy rises and falls. Potentially variable revenues and a large fixed cost base make unforeseen shocks an ever present risk.

Perhaps with the inherent cyclicality of running premium brands like British Airways and Iberia in mind, IAG is exploring building out lower-cost services. IAG had wanted to bolster its offering by acquiring rival operator Norwegian, but after at least two failed approaches decided the price wasn't going to be right. Transatlantic flights from Barcelona under the LEVEL brand kicked off a slightly lower key foray into the low-cost long-haul market.

For now though, the focus remains on the more established brands.

2018 profitability was boosted by low fuel prices, but 2019 offered no such tailwinds. If IAG is to keep profits up, it'll need to improve efficiency elsewhere. The most recent results were positive on this front as revenue rose ahead of non-fuel costs.

Having been badly beaten up by coronavirus fear the shares are currently changing hands for 1.7 times book value, a more conservative way of valuing intensely cyclical and asset-heavy businesses like airlines, and a PE ratio of just 5 times expected earnings - both measures are below the longer-term average. The shares offer a prospective yield of 5.3%.

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Full year results

Full year passenger revenue increased 5.0% to €22.5bn and cargo revenue was down 4.8% to €1.1bn. Other revenue, such as priority boarding or extra luggage, was up 14.1% to €1.9bn. Fourth quarter growth was more muted at 4.1% for passenger and other revenue, and cargo revenue fell 10.4%.

Full year group capacity rose 4% over the course of the year and 84.6% of seats were filled, which is a group record. Fuller planes meant revenue per available seat kilometre rose 1.0% to 6.65 euro cents despite lower average prices. Non-fuel costs per seat dropped 0.9% at constant currency, although fuel costs per seat increased 5.7% on the same basis.

IAG's profit after tax fell 40.8% to €1.7bn, although this includes an exceptional €672m pension charge and last year included a similar €448m benefit. Excluding these exceptional items, profit after tax fell 1.4% to €2.4bn.

Net debt rose 17.7% to €7.6bn, which is 1.4x cash profits. This is still below the group's ceiling of 1.8x, with the jump reflecting higher capital spending on aircraft.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.