Broker tips: IAG, Pets At Home
By Iain Gilbert
Date: Monday 03 Aug 2020
(Sharecast News) - Analysts at Berenberg lowered their target price on British Airways parent International Consolidated Airlines from 375.0p to 300.0p on Monday but said IAG's planned equity raise paved the way for "unrivalled consolidation" and dividend flexibility.
Berenberg said IAG's leverage and liquidity will likely return to palatable levels by 2022 and stated its sensitivity analysis suggested pro-forma price-to-earnings ratios will remain more than 10% below mid-cycle levels.
However, while the German bank cut its estimates on an expected slower revenue trajectory to one-third below 2019 levels, Berenberg thinks there will asymmetric upside in IAG's shares and opted to retain its 'buy' rating on the stock.
"Even through a slow recovery, we expect opportunities from overhangs related to IAG's rights issue, the Air Europa purchase and labour/fleet restructuring to fall away," said the analysts.
Berenberg highlighted that IAG currently trades on an enterprise value to earnings before interest, taxes, depreciation, amortization and rent of 3.2x its 2022 estimates, while enterprise value to invested capital also remained "compelling" at 0.9x given that it expects the group to generate a return on invested capital in excess of the weighted average cost of capital through the cycle and in 2022 - well before its peers.
Pets at Home's share price is now up with events after a solid trading update, Shore Capital said as the broker cut its rating on the company to 'hold'.
The pet supplies retailer's performance swung wildly in the 16 weeks to 16 July, dropping 13.5% at established stores in the first eight weeks and rising 12% in the following eight weeks as lockdown measures were relaxed. Online sales rose 71% during the period.
Shore analyst Greg Lawless said the shares' positive reaction to the trading statement had left the company fairly valued with short-term pressures such as rising costs and a potential second UK lockdown also priced in.
Cutting his rating on the FTSE 250-listed group to 'hold' from 'buy', Lawless said Pets at Home was financially strong and would be a long-term success but that the shares had outperformed the wider market and there was no apparent trigger for further increases.
"Given the uncertain outlook we do not think there will be material upgrades to forecasts, nor do we believe that there is a short-term catalyst and therefore believe that the shares now look up with events," Lawless wrote in a note to clients. "Whilst the short-term outlook remains uncertain, we highlight that the longer-term remains more favourable with increased demand for pet ownership in the UK."
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