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IAG - clinging to cash and waiting out the storm

Nicholas Hyett, Equity Analyst | 26 February 2021 | A A A
IAG - clinging to cash and waiting out the storm

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: 132.22 | Buy: 132.34 | Change 0.56 (0.43%)
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IAG reported a 69.4% drop in full-year revenue to €7.8bn and an underlying loss of €7.4bn. Excluding one-time accounting charges the group's underlying loss came in at €4.4bn.

The performance translated to a €1.96 loss per share, worse than analysts expected. However, new funding and lower-than-expected operating costs meant the group isn't in danger of a cash crunch in the near-term with net debt better than expected.

No 2020 dividend will be paid.

Due to the uncertainty on impact and duration of the pandemic, the group offered no guidance for 2021.

The shares rose 2.3% following the announcement.

View the latest IAG share price and how to deal

Our view

You can't knock management's efforts through the pandemic. Having pieced together a multitude of loans, deferred pension payments and shifted costs of the Air Europa merger further into the future, the group isn't in danger of a cash-crunch anytime soon.

To make up for lost passenger flights, IAG ramped up cargo-only flights--though it's done very little to dull the pain of a 75% decline in passenger revenues. Still, a strong balance sheet does at least mean it's in a strong position to return to the skies when lockdowns end. IAG will hope the number of airlines vying for passengers is smaller, supporting ticket prices.

The biggest question on our minds now is whether the vaccine will open the door for a summer travel season. While IAG can likely last through the latest wave of lockdowns, another summer sitting on the tarmac will add to the group's already considerable scarring. We think long-haul travel will be last to recover, putting IAG in a precarious position if a return to normalcy is further delayed.

While the vaccine has offered a light at the end of the tunnel, investors shouldn't lose sight of how much damage has been inflicted. Capacity cuts and the severe cost reduction programme mean IAG will be a significantly smaller company when it emerges from this crisis.

IAG key facts

  • Price/Book Ratio: 0.19
  • 10 year average Price/Book ratio: 0.37
  • Prospective yield: 0.3%

All ratios are sourced from Refinitiv. 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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Full Year Results

Full year passenger capacity was 33.5% of 2019, due to limited travel amid the pandemic. Passenger revenue was also lower at €5.5bn (2019: €22.5bn). Capacity for the current quarter is expected to be around 20% of 2019, but remains uncertain and subject to review.

The group upped its cargo flights in response to the pandemic, flying and additional 4,003 cargo-only flights throughout 2020. That meant a 16.9% increase in cargo revenue to €1.3bn. Other revenue, which includes passenger extras like priority boarding, declined to €988m from €1.9bn.

The group's planes were 63.8% filled (2019: 84.6%). That translated to a 26% decline in revenue per available seat kilometre to 4.93 euro cents. Meanwhile, the cost per available seat rose from 6.58 euro cents to 10.81 euro cents.

To cope with reduced capacity, IAG focused on cost-cutting measures resulting in a 44.9% reduction in operating costs to €12.2bn for the year. Excluding exceptional items, depreciation, amortisation and impairment, costs were down 49.6%.

The group's net debt position increased by €2.2bn to €9.8bn.

As at December 31 the group had cash and interest-bearing deposits worth €5.9bn, undrawn loan facilities of €2.1bn and a €2.2bn UK Export Finance loan, giving the firm access to €10.3bn worth of funding.

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 Refinitiv. 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 for more information.