Interactive Investor

Share of the week: A British icon

28th October 2016 17:37

Lee Wild from interactive investor

Blighted by terrorist attacks, the Brexit vote, strike action and volatile currency markets, British Airways-owner International Consolidated Airlines has done well so far this year. In fact, third-quarter results released Friday were bang in line with forecasts, and company guidance implies operating profit will grow by 7% in 2016.

That's impressive, given Brexit has already had an impact on business volumes and the weak pound could deter travel out of the UK. IAG shares had plunged by over 40% in the first six months of this year, but a recent hunt for "cheap" shares has gathered pace recently as the "bond proxies" become too expensive.

Shares in the flag-carrier are up over 20% in the past three weeks, a hunk of which was achieved this week in the run up to these results. And they didn't disappoint.

Underlying operating profit was down 3.6% at €1.2 billion (£1.1 billion) in the three months to September, but that met consensus estimates. It's up 6% for the nine-month period to €1.9 billion, and management now expects to make about €2.5 billion for the 12 months. Previous guidance was for "low double digit percentage growth".

And, reassuringly, chief executive Willie Walsh has seen "no significant change in its short-term trading conditions".

Passenger revenue fell 5.4% in the third-quarter to €5.8 billion, although an increase in "other revenue" like maintenance and handling businesses narrowed the total top line decline to 4% and €6.5 billion.

A 10% increase in the interim dividend to €0.11 a share should give a full-year payout of €0.24, according to Irish broker Davy. That generates a prospective yield of around 5%. Based on its forecasts for adjusted earnings per share (EPS) of €87.8, the shares also trade on a forward PE ratio of around 5.6 times for 2017.

All eyes now shift to a capital markets day on 4 November. Analysts at Barclays expect IAG to reiterate most of its targets, including margins of 12-15%, return on invested capital of 15% and free cash flow at €1.5-2.5 billion.

"We believe IAG can sustainably beat its mid-cycle margin targets, based on the sheer scale of structural ex-fuel cost and revenue improvements available across the group," writes Barclays, repeating its 460p price target.

"We see this driving through-cycle cash generation. In the near term, we acknowledge that demand challenges post-Brexit are likely to suppress yields and limit margin expansion."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.