Davy cuts IAG to 'neutral' as rights issue looms

Davy cut its rating on IAG shares to 'neutral' ahead of an imminent painful rights issue for the owner of British Airways.

Analysts Stephen Furlong and Ross Harvey said IAG's rights issue, expected in September, was likely to dilute shareholders by at least 50% to raise €2.75bn (£2.5bn).

IAG's base case plan is to be 24% smaller in 2021 and for passenger demand to take at least four years to return to 2019 levels, Davy said. The company will suffer a €2.9bn operating loss in 2020 before recovering to post a €620m profit in 2021 and profit of €2bn and €2.7bn in the following two years, they predicted.

The Davy analysts reduced their rating on IAG from 'outperform' with a price target of £2 a share. The company, which also owns Aer Lingus and Iberia, has burnt through £178m a week of cash during the Covid-19 crisis. It has attracted criticism from unions and politicians over a brutal programme of job cuts at BA.

"We … downgrade IAG to 'neutral' with its highly dilutive rights issue to come in September," Furlong and Harvey wrote in a note to clients. "The pertinent question for the network airlines, which transfer passengers through large hubs connecting long-haul destinations, is whether they can recover and, if so, how long will this take."

IAG shares were down 2.2% to 213.9p at 10:48 BST. The shares have fallen by almost two-thirds in 2020 amid the biggest crisis in airline history caused by the Covid-19 pandemic.

Davy kept its 'underperform' ratings on Air France KLM and Lufthansa and 'outperform' recommendations on easyJet and Ryanair.

Lufthansa needs to deleverage but government funding has given it €11.8bn of liquidity and the company has said it does not need to raise equity or sell assets cheaply, Davy said. The German airline will post a €4.9bn operating loss in 2020 before returning to profit in 2021, the analysts forecast.

Air France has a long road ahead to reduce its debt and restructure, the analysts said. The company will post an operating loss of €4.1bn in 2020 and €590m in 2021 before returning to profit in 2022, the analysts predicted.

Furlong and Harvey did not publish comments on easyJet or Ryanair.