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IAG: MEASURES AND IMPLICATIONS FROM COVID 19 (ANÁLISIS BANCO SABADELL)

More specific details have not been given on the measures and their impact, although it does appear that the most significant flexibility, that of employees, is being put into place and will help. In any event, according to our calculations, with the cash outflows forecast to date, IAG needs €~5 Bn of EBITDA in order to be able to pay out its dividend without burning cash (without taking working capital variations into consideration). In the current scenario, assuming a capacity reduction of -30% for the full year (vs. -15% with the reductions announced to date; assuming that the restrictions will not be lifted until the summer), we think it will be difficult for IAG to be able to reach more than € 3 Bn of EBITDA, meaning that it should reduce cash outflows by around € 2 Bn (around 50% of FCF generated in 2019). We think this is overly ambitious, and thus we believe that unless there is very strong recovery, the final dividend’19 will be cancelled. Looking ahead to 2021, thanks to the current oil price and the elimination of leased aircraft (40 aircraft leasing contracts expire), we think €~1 Bn will be freed up. This, along with an improvement to the situation, would leave a more favourable situation, probably allowing the dividend to return. This assumes IAG’s capacity will remain -25% below that forecast in 2021.
In short, we think IAG’s financial situation, with € 9.3 Bn of cash (€ 7.35 Bn of cash + € 1.9 Bn in credit lines), allows it to make decisions relatively calmly. The key in the short term will be the negotiations with unions and the reductions to cash outflows, and we reiterate that we believe the final dividend’19 will be cancelled.
We will revise our estimates, but we think that even in a scenario of -25% lower capacity (assuming global air traffic will fall by -75% is not reasonable, and we understand that restrictions will begin to be lifted) IAG would be able to pay out a dividend, generating €~5 Bn of EBITDA thanks to a cost structure more in tune with the reality in the sector, and this could occur as early as 2021. Even in this scenario, our T.P. would not fall below € 4.50/sh. (+55% vs. the current share price and -45% vs. our current T.P., which we place Under Revision). This is even without considering that after the current situation we will see a more favourable competitive environment due to the smaller number of airlines, which will lead to structurally higher unit revenues and will allow the sector to recover its profitability through prices. Thus, the current share price would be factoring in €~2 Bn of normalised EBIT (-41% vs. 2019 and the amount assumed in our valuation to date).