Credit Suisse ups target for IAG on likely peak in leverage in Q2

Analysts at Credit Suisse bumped up their target price and reiterated their ‘outperform’ recommendation for shares of IAG, arguing that the carrier’s leverage was likely near its peak.

If the company’s forward bookings strengthened enough then net debt might peak at approximately 12bn in the second quarter.

Indeed, despite disappointment on the timeline for easing UK travel restrictions, the analysts saw scope for cash from forward bookings to surprise positively.

“With 3bn in revenues possible in 3Q21 we see

scope for several hundred million Euros of cash from forward bookings to flow in through June,” they explained in a research note sent to clients.

Hence their decision to revise their target price up by 12% to 256.0p.

IAG’s 2021 operating loss was now seen coming in at 2.8bn instead of -2.3bn.

Nevertheless, the Swiss broker also bumped up its estimate for IAG’s earnings before interest and taxes from 643m to 857m.

That was despite an anticipated mid-single digit percentage point reduction in the carrier’s short haul capacity in 2022 when compared to 2019 and a double-digit cut to its long-haul capacity.

Credit Suisse also pointed out the risk that the US-UK might fail to reopen before 2022, which could see IAG’s debt pile grow to 13bn by the end of 2021.

Yet it believed that IAG might tolerate that higher leverage if there were confidence regarding the recovery in demand.

In that regard, it noted how IAG net debt in 2020 was “effectively” fully represented by aircraft leases.

Furthermore, rival United’s published target of returning to its net debt level of 2019 by 2016 had eventually been accepted.

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