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IAG - new capital and capacity cuts

Nicholas Hyett, Equity Analyst | 10 September 2020 | A A A
IAG - new capital and capacity cuts

No recommendation

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: 106.95 | Buy: 107.10 | Change 6.85 (6.85%)
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IAG shareholders have approved the issuance of almost 3bn new shares to raise €2.7bn in fresh capital. The new shares will be sold for €0.92 each, representing an effective 35.9% discount to the price on 9 September.

The new capital will be used to pay down debt, enhance liquidity and give management flexibility.

The shares fell 1.2% following the announcement.

View the latest IAG share price and how to deal

Our view

Demand for flights was starting to recover as travel restrictions were lifted earlier this year. But this has been set back by recent quarantine requirements.

IAG has therefore scaled back its capacity plans and thinks it will take until at least 2023 for demand to fully recover.

The disruption means net debt has been gaining altitude too, and management is acting pre-emptively to shore up the balance sheet. We think the new capital raise is necessary even if it will dilute current shareholders. IAG's debt burden could otherwise have curtailed management's options as it tries to negotiate the recovery.

Encouragingly, the group expects to break even on a cash flow basis in the fourth quarter of this year. This would provide a more solid foundation as we head into 2021, which will be needed as there's a real chance challenges will continue. Subdued demand isn't going to reverse all that suddenly as things stand. The precarious outlook and lower than expected demand means the group is reducing headcount across large sections of the business. So far, British Airways has borne the brunt of the job losses, with a planned reduction of 13,000 roles. This is going to be expensive in the short term, but is a necessary move.

The risk-reward profile of all airlines has been heightened dramatically by COVID-19. It's possible that some airlines will not make it through this degree of disruption, especially if we get a second wave of infections and travel restrictions or quarantine requirements remain in place for some time. However, those that do make it could see their competitive position strengthened in the end.

Significant liquidity puts IAG in a stronger position than some of its peers, and this is its main attraction in our view. But investors shouldn't lose sight of the fact the short-term earnings hit has been very ugly, and could get worse before it gets better. Given planned cuts to capacity and the severe cost cutting programme, it will be a smaller company which emerges from this crisis.

IAG key facts

  • Price/Book ratio: 0.7
  • Ten year average Price/Book ratio: 1.9
  • Prospective yield: 0.0%

Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Trading details

Since July IAG has seen a "levelling off" in new bookings as governments have imposed quarantine requirements for holidaymakers. As a result the group has reduced its planned capacity: Q3 capacity is expected to fall by 78% (previously 74%) and Q4 capacity by 60% (previously 46%). 2021 capacity is expected to fall 27% compared to 2019 (previously 24%), and the group still thinks it will take until 2023 for demand to fully recover. IAG still expects to break even on a cash flow basis in Q4.

As of 31 August IAG had €7.6bn in available liquidity, including €5.8bn in cash and equivalents and €1.8bn in undrawn credit.

IAG is continuing to reduce headcount to reflect lower demand, and expects this to cost around €330m.

Find out more about IAG shares including how to invest

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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.