IAG shares tipped to double in value and more

The British Airways owner has traded sideways since the pandemic started three years ago, but City experts believe the shares are hugely undervalued. Here's how they justify a spectacular new price target. 

A bullish report on International Consolidated Airlines Group SA (LSE:IAG) today backed shares to reach 350p as the BA owner enjoys a twin boost from improving demand and falling jet fuel prices.

Broker Liberum believes a current price of just above 152p also fails to take into account the fact that IAG’s favourable strategic positioning has been unaffected by the pandemic.

Furthermore, the City firm said supply chain bottlenecks affecting aircraft production should constrain the industry’s ability to erode the favourable conditions through too much capacity.

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Liberum’s upbeat stance comes after IAG said on Friday that full-year operating profit before one-off items will be above previous guidance of between 1.8 billion and 2.3 billion euros (£1.6-£2 billion).

It said Iberia contributed a record first-quarter profit as all IAG’s airlines performed above expectations, benefiting from robust demand and a lower fuel price in the quarter. Capacity should be around 97% of 2019 levels for the full year.

Chief executive Luis Gallego added: “We are seeing healthy forward bookings with leisure demand particularly strong while business travel continues to recover more slowly.”

It added a note of caution to its improved guidance by highlighting the potential significant impact of geopolitical and economic events on the price of fuel and on consumer confidence, adding that it has limited visibility of customer bookings for the second half of the year.

In the wake of the results, Liberum boosted its operating profit forecast by 27% to 2.9 billion euros for 2023 and by 20% to just over 4 billion euros for 2024. Its new target price of 350p compares with 240p previously.

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Other broker rating changes this week include Barclays moving to 215p from 170p and Goldman Sachs edging up 5p to 185p, albeit with a neutral recommendation.

Bank of America remains at 240p but said an improving net debt position should “remove investor concerns on the risk of a potential equity raise”.

Despite the positive broker comment and IAG’s trading momentum, the shares are still within the 130-160p range seen since February. Prior to the pandemic, they had been above 400p.

Liberum points out that IAG trades on 6.1 times its updated 2023 earnings forecast, falling to 3.8 times for next year.

Its transport analyst Gerald Khoo said this valuation looked to be more consistent with late cycle multiples, rather than the relatively early stage recovery from the pandemic that IAG is in.

He added: “This year represents only the second profitable year, although the strength of unit revenue combined with the moderation in fuel prices is accelerating the pace of recovery.

“In turn, this is accelerating the pace of deleveraging, with IAG back to normal levels of leverage by 2024 on our new estimates.”

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Liberum’s report adds that IAG’s long-term earnings potential has not been affected by the pandemic, with its favourable strategic positioning still intact. Neither this, nor the strong positive earnings momentum is reflected in the current valuation, it added.

The City firm also pointed out that a 1% improvement in revenue would result in a further 13% uplift to its earnings per share forecasts, with a further $100/tonne reduction in jet fuel spot prices adding 15%.

On Friday, IAG reported an average jet fuel spot price for the quarter of $910 per metric tonne, some 5% lower than the same quarter of 2022 and reflecting a range of $1,140 in late January and $805 at the end of March.