British Airways owner International Consolidated Airlines (LSE: IAG) has seen its share price fall by more than 25% since March. After adjusting for last year’s rights issue, the shares are now worth just 15% more than they were one year ago.
With flying activity increasing as the pandemic eases, I wonder if this could be a buying opportunity. I’ve been taking a fresh look at IAG to find out more.
Reasons to be cheerful
I don’t think IAG is in the clear yet. But I can see some reasons to be cheerful.
The group’s airlines only flew 22% of their 2019 capacity during the second quarter of this year. But flying is expected to rise to 45% of 2019 levels during the third quarter. That seems like a solid step back to normality to me.
IAG’s cash position is also strong, with €10bn of cash available at the end of June.
Finally, analysts covering the stock expect this business to return to profitability from 2022. Although next year’s forecast net profit of €650m is only a fraction of the €1,715m profit reported in 2019, I think it should be enough to put the business back on a sustainable footing.
Why I’m still worried
I’d guess that one of the biggest frustrations for British Airways management today is that most non-US citizens travelling from the UK are currently barred from entering the US.
IAG has no control over these restrictions or other Covid-19 measures. This makes it tough for the airline to plan its operations efficiently.
This is a particular concern for me because transatlantic flights have historically been some of the busiest and most profitable for British Airways. Until US travel restrictions are eased, I think the business will remain under pressure.
IAG share price: cheap or expensive?
I believe IAG’s airlines will make a full recovery over the next couple of years. But I think that much of this has already been priced in to the shares.
Amazingly, IAG’s valuation today is higher than it was before the pandemic. We can see this using a metric called Enterprise Value, or EV. This measure is calculated by adding together the market value of a company’s shares and its net debt. EV tells us how much a buyer would have to spend to buy the whole company outright.
IAG’s enterprise value was about £16.5bn at the end of 2019. Today, it’s £18.4bn. This tells me that the business is valued more highly today than it was before the pandemic.
There are two reasons for this surprising situation.
The first is that IAG’s net debt has risen from £6.5bn to £10.3bn since the end of 2019. That adds £3.8bn to EV.
The second reason is that IAG issued nearly 3bn new shares in 2020, when it raised £2.3bn in a rights issue. These new shares have doubled in price since they were issued at around 80p. That’s lifted the group’s market cap.
Will the IAG share price rise in September? I can’t see any good reason for this to happen. This business is already valued ahead of pre-pandemic levels, but profits aren’t expected to return to 2019 levels until 2023.
In addition to this, IAG must prioritise debt repayments, restricting dividend potential.
In my view, IAG shares are expensive and could fall further in September and beyond. I won’t be buying at current levels.