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IAG: 1Q’20 RESULTS (ANÁLISIS BANCO SABADELL)

1Q'20 vs. 1Q'19 Results
Sales: € 4.6 Bn (-13.5% vs. -12.2% BS(e));
EBIT: € -525.0 M (€ 135.0 M in 1Q'19 vs. € -225.0 M BS(e) and € -199.0 M consensus);

The company yesterday released preliminary 1Q’20 results worse than expected. Recurring EBIT came in at €-535 M (vs. €-225 M BS(e) and €-199 M consensus and +€ 135 M in 1Q’19) due to a worse performance in costs (no details were given). Additionally, the group outlined that EBIT has been impacted by an one-off burden of € 1.3 Bn as a result of the ineffectiveness of the fuel and currency hedging for the rest of 2020 due to over-hedging, a figure that is calculated at the end of the quarter and we assume it does not entail any cash outflow.
As for the outlook, the company expects a “significantly larger” operating loss in 2Q’20 (due to the lower capacity, already known). Specifically, in April and May this capacity has been -94% lower than in 2019, compared to the -10.5% reduction seen in 1Q’20. It has also mentioned that demand levels will take several years to recover (in line with expectations and sector comments), and that IAG will adapt to the situation with restructuring measures, specifically it mentions a potential reduction of ~12,000 workers in British Airways (~20% of the group workforce).
The company has confirmed the liquidity level of € 9.5 Bn as of 31 March’20 (€ 6.95 Bn in cash vs. € 7.35 Bn on 12 March; this means €~17 M/day of cash burning; €~530 M/month). This figure rises to € 50 M/day over the last 5 days of March, but we think the concentration of payments at month end means this figure is not very representative. Also note that the cost cutting (temporary layoff plans and salary cuts) only have an impact starting in April.
In conclusion, we believe that this set of results does not reduce the uncertainty weighing on the share price and we expect the company to provide further details in its results presentation on 7 May. We keep our T.P. Under Revision and reiterate our BUY recommendation. We will cut our estimates, but even in a scenario of 20% less capacity vs. 20219 in recurrence (the current -94% for the next two months is due to the restrictions put in place, which will be lifted eventually) EBIT might stand at €~2.5 Bn (with the EBIT/ASK ratio returning to 2019 levels in three-year’s time), thanks to a cost structure more in line with the reality of the sector, which would bring our T.P. to levels of € 4.00/sh. (+60% vs. the current share price). Currently we believe the stock could be pricing in -35% less capacity in the long-term. In any event, there is very low visibility in the short-term and this has not changed after the company’s comments today, which explains the negative market reaction in spite of the fact that the share price has fallen -70% from 18 February highs (-37% vs. IBEX), having risen by +12% from March lows (in line with the Ibex). BUY. Target Price: Under Revision.