IAG Shares Undervalued, ‘Outlook to Remain Positive’

International Airlines Group (LON: IAG), the parent company of British Airways and Iberia, has been highlighted as a top stock pick among network carriers by Morningstar analysts, who initiated coverage of the stock with a fair value estimate of 224p per share.

Despite facing challenges, including increased competition and economic headwinds, IAG is considered undervalued, bolstered by strong travel demand and enhanced operational efficiency.

“We assign a fair value estimate of GBX 224 per share to IAG, supported by robust travel demand, gradual capacity recovery, and enhanced operational efficiency, leading to improved profitability and cash flow generation,” Morningstar states.

Morningstar says they “expect IAG's outlook to remain positive in the midterm,” with Revenue Passenger Kilometers (RPKs) expected to reach 125% of 2019 levels by 2028.

They believe this growth will be driven by strategic investments in fleet modernisation and the expansion of key profitable markets, particularly in the North Atlantic and Latin America.

Morningstar notes the airline group has also undertaken a transformation program focused on cost efficiency, including plans to replace 140 planes with new, more fuel-efficient models.

These investments are expected to reduce training and maintenance costs, further improving profitability.

When it comes to IAG's debt levels, Morningstar notes that at the end of H1 2024, the group had a net debt position of £6.4 billion and total liquidity of approximately £13.2 billion. “This strong liquidity ensures the company can manage its debt obligations spread over the next six years effectively,” Morningstar analysts write.

With a solid financial position, including a net debt/EBITDA ratio of 1.1 times, Morningstar believes IAG is well-positioned to navigate industry pressures and capitalise on the ongoing recovery in global air travel.