Jefferies hikes price target on BA and Iberia owner IAG

Jefferies hiked its price target on BA and Iberia owner IAG on Wednesday to 350p from 270p saying it expects the fourth quarter to deliver similar trends to Q3, driving confidence in the short-term macro and travel environment.
"Medium term, we see a multi-year earnings and re-rating story, as the BA turnaround and delivery of the NG fleet offer scope for further consensus upside and re-rating potential as the company approaches best-in-class return on invested capital and free cash flow generation," it said.

The bank updated its model for Q3 results and ahead of full-year results in February. It raised EBITDA estimates by 5-9% in FY24-26 and earnings per share estimates by 9-20% on lower interest expenses and share buybacks.

Jefferies said BA's target to reach 15% EBIT margins by 2027 versus 10% in 2023 appears a "sensible" midcycle target, but it believes may be conservative in an upcycle. It noted that Iberia already makes 14% margins versus BA's 10% in 2023.

"Our benchmarking shows fuel costs are the largest driver of margin differential. We believe this should narrow as BA receives its A320/1 Neos and 777-9/787-10s," it said.

"Achieving the same new generation fleet mix as Iberia alone would drive circa 500bps of margin expansion, on top of the announced self-help initiatives."

Jefferies - which has a 'buy' rating on the shares - added that the valuation looks compelling.

At 0955 GMT, the shares were up 1.9% at 302.90p.