Goldman leaves IAG at 'buy', raises target price

Goldman Sachs said it expects International Consolidated Airlines to generate strong free cash flow (FCF) over the next two years.

The British Airways owner’s valuation is attractive in the context of growth and returns, according to GS analysts.

The analysts said the company’s growth would be driven by an improving load factor and premium volumes, higher first quarter margins and moderating industry summer capacity growth.

“IAG continues to strengthen its competitive position and medium-term return on capital prospects by improving its unit costs (fourth quarter unit cost excluding fuel -3.9%), increasing its exposure to concentrated markets (North Atlantic, Heathrow) and playing an active role in industry consolidation,” the bank said in a note to investors.

“We expect strong FCF generation over 2016 to 2018 (average 9.5%) to underpin its dividend policy (25% payout; 4% yield) and support progressive deleveraging, thus strengthening further its balance sheet (2017E adjusted net debt/EBITDAR of 1.5x).”

Goldman reiterated its ‘buy’ rating and raised its target price to 810p from 775p.