When I last wrote about British Airways owner International Consolidated Airlines Group (LSE: IAG) in August, I warned that the firm’s planned €2.75bn fundraising could cause the IAG share price to slump.
I promised to take a fresh look at IAG when the terms of its fundraising were confirmed. That happened today. In this piece I’ll explain what will happen next and when I’d buy IAG shares.
New stock on sale under €1
IAG plans to issue 2.9bn new shares in a rights issue that will raise €2,471m. This will increase the firm’s total share count by around 145%, from 2bn to almost 5bn. The new shares will be priced at €0.92 (around 84p).
Ahead of today’s announcement, IAG shares were trading at about 200p. So we can see that the company had to offer a pretty hefty discount to persuade its big shareholders to take part.
When the new shares start trading, IAG’s share price will fall to a level which averages out the value of the old and new shares. My number-crunching suggests that in theory, this price should be about 131p.
As this is a rights issue, the new shares will be offered to existing shareholders first. If you already own IAG shares, you can choose to buy all, some or none of your entitlement. Shareholders who don’t take part will see their stake in the firm shrink — this is known as dilution.
If you don’t want to buy the new shares, you may be able to sell your unused rights — ask your broker for details of how to do this.
Disappointing trading
I expect IAG to make a recovery, but it could take a while. The company says that after a surge of bookings in June, passenger numbers have levelled off. Unsurprisingly, management says that border restrictions and quarantine rules are holding back demand.
IAG has now downgraded its capacity forecasts for the next 18 months. In 2020, the company expects passenger numbers to be 63% lower than in 2019, compared to a previous forecast of -59%. In 2021, capacity is expected to be down by 27% versus 2019, compared to a previous forecast of -24%.
These numbers show how the pandemic has had a devastating impact on the airline industry. But I wonder whether the outlook for 2021 is better than it seems right now. After this year, I’d guess that managing a 27% reduction in capacity might not be as difficult as it sounds.
IAG share price: what I’d do now
If I was a shareholder, I’d take part in the rights issue. But if I was thinking about making a new investment in IAG, I’d wait until after the rights issue shares start trading. There’ll be plenty of shares available and if the news stays grim, IAG’s share price may even fall below the ex-rights level of 131p.
City brokers expect IAG to report a small profit in 2021, but my sums suggest that after factoring in the rights issue, the stock is still trading on about 35 times forecast earnings.
I’m sure things will improve. But I think it could be a long road. Right now, I don’t see any rush to invest in airline stocks. I think there are better opportunities elsewhere.