JPMorgan reiterates 'top pick' on IAG, notes 70% return potential
JPMorgan Cazenove reiterated British Airways and Iberia owner International Consolidated Airlines Group as its 'top pick' in the European airlines sector on Monday, rated at 'overweight', noting 70% return potential.
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JPM noted that the shares fell 22% in the three months leading up to its results last week due to profit warnings from the likes of Ryanair and Lufthansa, Brexit worries and the threat of strikes by BA staff. However, the group's second-quarter results were "very solid", JPM said, as it delivered earnings before interest and tax 5% ahead of company-compiled consensus and reiterated its FY19 guidance.
JPM increased its FY19E EBIT and earnings per share estimates by 2%, staying slightly below guidance "to be prudent". It also trimmed its FY20-21 EPS estimates by 3-4% per annum, "just to put some buffer in for uncertain times".
It left its €8.35 price target unchanged, indicating around 70% upside.
"Given IAG’s superior margins and less exposure to the troubled European short haul market, we think IAG is significantly undervalued," it said.
As far as Brexit is concerned, JPM said IAG has some "levers it can pull" in the event of a hard exit.
"It could immediately retire older wide body aircraft that are close to fully depreciated; it could return short haul aircraft on lease; and it points out that circa 50% of revenue is not denominated in sterling.
"We also believe that in a hard Brexit IAG’s peers would also pull capacity and so the industry supply-demand equation might be better than some fear."