IAG hits some Brexit turbulence

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IAG hits some Brexit turbulence

IAG at 392p, after the first-half figures, looks very cheap in cash and operating cash flow terms, which also makes the prospective estimated dividend yield of 5 per cent look credible and safe. The price remains below the price on Brexit referendum day.

IAG is of course still flying but no longer flying as high as it was back last December when it rose above 600p, touching a peak at 619p before diving back earth. At the current share price of 392p, the shares have fallen a not inconsequential 46 per cent from that peak in the space of eight months. At this level, the share price is back to the level last seen in 2014. Such a slump is an invitation to the fundamentalist value seeker to have a closer look. But prior to that, a closer check of the share price chart and possible technical conditions and prospects is in order.

It strikes me that the share price is arguably now on a discernible three point support. It has been on an uptrend since 2014 and now looks as though it has possibly returned to the ‘support’ line of that trend in terms of the maximum downswings away from the central linear progression of the share price. As I always say on these occasions, have a look for yourself to see if you come up with the same interpretation. If that proves to be correct, then there seems to be plenty of room for an upside recovery given the extent of the fall.

The share price fell off the Brexit cliff the day after referendum day. It stopped falling at 363p, recovered a bit, but has not returned to anywhere near the pre-referendum vote price.

Clearly, IAG is not a Brexit winner, as it might have been when it consisted solely of British Airways largely plying the Atlantic route. Nor is it an obvious Brexit loser – if as I expect, things turn less attractive in the UK economy from this winter onwards, as import price inflation starts to eat into the spending power of UK residents. It is somewhere in between, which is doubtless another reason for looking for value, or otherwise, in its equity when the market has made up its mind about other more obvious stocks.

Having merged the Anglo-American British Airways business with the Hispano-South American business of Iberia, IAG now suffers from what is reported as exceptional industrial traffic control relations problems and strikes in the EU. That particularly impacts the Iberia segment of the business because it provides a cheap flight service across Europe. However, those economic and financial efficiencies seem to have partially protected the company and its shareholders by evidently keeping rising non-oil costs in the first half of this year to a reported mere 1.3 per cent. On the other hand, the arrival of Air Lingus will have boosted the size of the newly enlarged group’s exposure to the Trans Atlantic trade giving the newly enlarged company further diversification problems. Anyway, the industrial problems in European traffic control will terminate at some point.

Another problem is terrorism – a headline factor which in statistical significance terms is more apparent than it real. It is hard to imagine that that this will continue  as a sustainable condition in holding back the world’s civil aviation travel, though it will continue to ebb and flow in terms of headlines and consumer worry.

The other problem is the devaluation of the pound, because IAG is a company that accounts and reports in Euros. The British Airways sterling contribution to the central coffers will suddenly be much less in Euro terms than previously expected. For many international investors, it must add a layer of current puzzlement over IAG’s prospects.

So what fundamentally is an investor getting for his or her money when buying or selling IAG at around this very low price level?

First, the business has been increasingly cash generative. Last year, annual operating cash – at just under Euro 2 billion – may have been only 5.7 per cent higher than it had been in 2014, but it was more than 60 per cent up on the amount generated in 2013. In the first half of the current year to 30th June, cash rose to Euro 2.2 billion – almost an eighth higher than the entire annual operating cash flow in 2015 and 45 per cent higher than the cash flow generated in the first half of that year. That is great progress!

In consequence, cash held by the company as at 30 June this year had grown to Euro 3 billion, a record figure. Translating that balance sheet cash into a measure of equity value, the shares are selling at around only 2.4 times cash held in June, which strikes me as being a very low valuation. On the last annual operating cash flow figure the price to cash flow ratio is only 3.9 times, another low valuation.

Moreover, that cash position looks adequate to the cash needs of the company as measured by the last set of annual results. Last year, operating cash flow covered total annual investment and the annual dividend 1.27 times. It covered the dividend alone twelve times. All of which – including the cash and cash flow figures for the first half of the current year – suggests that the dividend looks to be a small cost and reassuringly well covered.

The market in consensus puts the shares on a safe looking estimated dividend yield of 4.8 per cent for this year, rising to 5 per cent for next year.


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