IAG shares set to struggle after €2.74 billion rights issue

• IAG shares slide after €2.74 billion rights issue
• Air travel demand rising, but surging Covid-19 cases threaten tighter restrictions
• Analysts at Berenberg set 260p target price for IAG stock

International Consolidated Airlines Group (IAG) shares could struggle after completing its €2.741 billion rights issue last week, with rising air travel demand threatened by a surge in coronavirus cases throughout Europe.

The capital increase is designed enable the British Airways owner to strengthen its balance sheet, reduce leverage, enhance liquidity and help the group withstand a more prolonged downturn in air travel amid the pandemic.

‘IAG believes the capital Increase, together with its quick response to the crisis, should enable the Group to emerge from the current pandemic in a strong position, with more resilience, greater flexibility and the ability to make the right operational and strategic decisions for the long term benefit of all its stakeholders,’ the company said in a statement.

IAG ready to weather the storm

Despite the myriad of challenges facing IAG, its recent capital hike has come at the appropriate time and will enable the company to weather the approaching storm.

Restrictions in air travel have eased since lockdowns in March, with the airline group offered government support from the UK and Spain to navigate those difficult times. However, air travel demand has picked up over the summer, with IAG looking to use its fresh injection of capital to expand operations and capitalise on increased passenger numbers before winter.

At the same time, coronavirus cases across Europe are surging, threatening tighter travel restrictions and even the prospect of another lockdown, which would spell disaster for IAG and the airline industry as a whole.

Revenues more than halved at IAG, with the company generating €5.3 billion in revenues for the six months ending 30 June, down from the €12 billion generated over the same period a year prior.

This resulted in IAG reporting a operating loss of €1.9 billion (excluding exceptional items), down from the more than €1 billion in profit it made over that same period in 2019.

‘We continue to expect that it will take until at least 2023 for passenger demand to recover to 2019 levels,’ IAG CEO Willie Walsh said.

‘Each airline has taken actions to adjust their business and reduce their cost base to reflect forecast demand in their markets not just to get through this crisis but to ensure they remain competitive in a structurally changed industry..

Berenberg reiterates ‘buy’ rating for IAG stock

Analysts at Berenberg offered an optimistic outlook for IAG after it reiterated its ‘buy’ rating for the stock last week and gave a 260p price target, implying a potential upside of 103%.

The ability for IAG shares to hit that price target is dependent on how strong it emerges from the coronavirus pandemic, with investors growing increasingly concerned about tighter restrictions being applied by European governments to curb the spread of the virus.

‘IAG has a proven and successful operating model underpinned by its portfolio of world-class brands, global leadership positions in each of its home markets and unique structure,’ the airline group said in a statement.

‘The Group has a strong track record of value-enhancing consolidation and delivering value to shareholders through industry-leading returns and growing profitability.’

IAG is trading at 128p per share at the time of publication, with the stock down 50% year-to-date.

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