International Consolidated Airlines Group
The old saw about British Airways was that it is a massive pension fund with an airline attached (Robert Lea writes). That idea hasn’t gone away and the carrier is still plugging the black hole at a rate of £450 million a year.
In addition to that millstone, BA and its parent company IAG have been deeply affected by the coronavirus pandemic, as badly as any global aviation group.
IAG, or International Consolidated Airlines Group, is made up of the UK’s privatised flag carrier BA, its Spanish counterpart Iberia — with whom it merged in January 2011 to create IAG — and the subsequent acquisitions of the Spanish discount short-haul operator Vueling and the former Irish state airline Aer Lingus.
Those four control more than half the take-off and landing slots at Heathrow, Europe’s busiest airport which in normal times was handling 80 million passengers a year.
Various numbers tell you the deep trouble that IAG is in. Heathrow, for instance, is handling just 11 per cent of the passengers that went through its terminals last year, and the lucrative air corridors across the Atlantic are all but closed.
IAG is still cutting its flying schedules. In the third quarter it was operating at 22 per cent of its capacity compared with a year ago. In the present fourth quarter it expects that to be at 40 per cent down from an estimate of 54 per cent.
For next year IAG expects capacity to be down by a worse than previously posited 27 per cent. It still believes that it will not recover to 2019 levels until 2023.
All that feeds through to the all-time lows that IAG’s shares have been trading at, further weighed down by the €0.93-a-share rights issue it has just gone through, raising €2.74 billion to see it through winter.
Yesterday’s 7 per cent rise to 106¾p — due to the latest hopes for easing travel restrictions — puts the shares at less than half where they were in June when hopes were still high of a rapid economic recovery from the pandemic. The shares are trading at barely a fifth of where they were before the outbreak spread west.
Which poses the questions of whether this is as bad as it gets for IAG and whether the share price levels represent a good entry point.
We cannot know how bad or long the second wave of coronavirus will be or how badly governments will continue to manage international travel restrictions. Even if there is a co-ordinated and credible response to airport testing we cannot know whether people will be prepared to start flying again and whether businesses will decide there is more risk than reward in putting their people back on planes.
What we do know across the industry, according to latest analysis by UBS, is this: this month’s fares are weaker than last month’s and pricing in the profitable premium cabins is weaker the further we get into the last quarter of the year. In short, UBS concludes: “The winter will be the most challenging this century.”
Marshall Wace, a hedge fund not known for taking the long view, is one investor that believes this is exactly the right time to back IAG. Last week it took a 3 per cent stake. Intriguingly it followed the long-expected departures of IAG’s chief executive, Willie Walsh, and the BA chief executive, Alex Cruz.
Mr Walsh’s reign leaves an airline group with troubled relations with its employees and passengers, and the sort of short-sighted cost-cutting that left its IT systems not fit for purpose.
If you are a holder of IAG’s shares you should be happy to be so, as this is a stock that will recover sometime this decade. If you are seeking an entry point, the journey will be like a flight in BA economy to New York: a long haul and not particularly comfortable.
Advice Hold
Why IAG shares have fallen a long way but their recovery will not be similarly dramatic
Gamesys
It may not be a household name but Gamesys is comfortably bigger in stock market terms than well-known gambling sector peers such as Rank Group, 888 Holdings and Playtech (Dominic Walsh writes). A few months ago it briefly overtook William Hill, but the proposed takeover by Caesars Entertainment has allowed the bookmaker to pull away.
A bid for Gamesys, whose main brand is Jackpotjoy bingo, is also a possibility, though with £136 million of cash on the balance sheet at the half year, the company is itself on the hunt for bolt-on acquisitions, either as a way to enter new territories such as Canada, India and Africa or to take Gamesys into new products such as sports betting.
Gamesys, a FTSE 250 constituent, declared a maiden dividend of 12p a share at August’s interims and has said that in the absence of any deals it would consider paying shareholders a special dividend.
Founded in 2001 by Noel Hayden after he was inspired by a Space Invaders machine in his father’s hotel, it owns games and brand licences including Virgin Games, Monopoly Casino and Heart Bingo. About 60 per cent of its revenues come from the UK and 25 per cent from Japan, which is a “grey market” legally for online gambling.
Last year, four years after it sold its Jackpotjoy brand for £530 million to what was then JPJ Group, the two were reunited when JPJ acquired Gamesys for £490 million and took on its company name. Its performance since has been strong.
In the first half of this year, it reported a 27 per cent increase in gaming revenues to £340 million, helped by lockdown gamblers, and it predicted full-year results would be “comfortably ahead” of expectations. Sure enough, third-quarter numbers released yesterday continued the trend of beating expectations, with revenue up 31 per cent to £190 million on the back of “high double-digit” growth in Asia and a “very solid” UK. It said it had made “a good start” to the final quarter.
The shares, thanks to some profit-taking from hedge funds, lost 102p, or 7.8 per cent, to £12.10 but shouldn’t take long to start rising again.
Advice Buy
Why If Gamesys is not acquired, it will use its cash to make acquisitions or return it to shareholders
