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First-quarter profit for IAG

Still no word on the Aer Lingus bid, but trading has picked up strongly
May 5, 2015

What's new:

■ No word on Aer Lingus bid

■ First-quarter operating profit

■ Lower fuel and unit costs

IC TIP: Hold at 557p

There's no word as yet, but International Consolidated Airlines (IAG) boss Willie Walsh says the fate of Irish carrier Aer Lingus will be settled in the next couple of weeks. The British Airways owner made a €1.4bn (£1.03bn) bid for Aer Lingus at the start of the year, and has been in negotiations with the Irish government which owns more than a quarter of the airline. The bid is conditional on acceptance by the government and Aer Lingus's largest shareholder, Ryanair (RYA), which holds a 29.9 per cent stake.

In the meantime, thanks to lower unit and fuel costs, IAG managed to post an inaugural first-quarter operating profit of €25m, compared with losses of €150m this time last year. Non-fuel unit costs were down 2.7 per cent in the first three months of the year, and fuel costs fell 11 per cent.

IAG still expects to generate an operating profit in excess of €2.2bn this year. That said, the rate of profit improvement in the second quarter will be slower than the first, due to the timing of Easter, and adverse year-on-year movements in fuel prices thanks to a strengthening dollar.

As the oil price climbed to a five-year high this week, shares in IAG dipped 2 per cent. But analysts said there may well have been some simultaneous profit-taking following a 35 per cent rise in the share price over the past 12 months.

 

Liberum says...

Buy. A rare first-quarter operating profit was encouraging and a touch better than our forecast and consensus. Posting even a small operating profit in the seasonally weakest quarter is both encouraging and atypical, even if there may have been a little support from the timing of Easter. Trading on a 2015 PE ratio of 10, we continue to see IAG as undervalued. Its valuation is closer to those of its network carrier peers, despite a superior financial performance which resembles the higher-rated low cost carriers. We expect pre-tax profit of €2.1bn this year, giving EPS of 75.6ȼ.

 

Cantor Fitzgerald says...

Sell. We recently downgraded our view on IAG. The group has strongly outperformed the sector and its close peers, and its valuation is now unattractive, trading on a 15 per cent net debt to cash profit premium to the sector. We are somewhat concerned about the group's reliance on profits at British Airways and, hence, North American traffic. These are solid first-quarter results but we think any good news is priced in, especially as management has been silent on progress with its €2.55 per share offer for Aer Lingus. Trading is also expected to slow in the second quarter.