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On another mixed day for the market, one of the biggest risers was International Airlines Group.
In common with the whole travel sector, the British Airways and Iberia owner has been hit be fears of the effect of the spread of the Ebola virus, while the positive aspect of fallilng oil prices has been overlooked.
But its shares climbed 15.5p to 339.6p, making it the biggest riser in the FTSE 100, after HSBC raised its rating from neutral to overweight and its target price from 380p to 400p. Analyst Andrew Lobbenberg said:
We think fears of Ebola’s impact on airline travel are overdone. The impact of falling fuel is under appreciated.
In the last month IAG has fallen 12% versus the market down 7%. We recognise that the Ebola epidemic is very serious in West Africa but we think it is unlikely to substantially impact air travel demand across IAG’s network. SARS created a major impact on air travel. But that apart we have seen a succession of health issues that have impacted aviation share prices vastly more than they have damaged traffic and revenues. Meanwhile, the price of kerosene has fallen 8% in the past month to $834 per metric ton. However, we assume jet kerosene spot price of $850 for 2015 and onwards in our model. Even taking into account the offsetting impact of the stronger dollar, we estimate a potential 4% further upside to IAG 2015 revised earnings before interest and tax should current oil and forex levels be sustained.
We think third quarter results on 31 October and the capital markets day on 8 November will both reassure.
IAG’s traffic data for the third quarter has been strong with premium traffic exceeding legacy carrier capacity and long haul benefiting from industrial action at competitors. We expect guidance for 2014 and 2015 to be sustained. At the capital markets day we expect the company to lay out growth plans for Iberia and Vueling and goals for BA to further build profitability.
We expect BA to sharpen its short haul cost base, while on long-haul it can grow onto bmi’s Heathrow slots with its new aircraft and relatively good cost base. These factors will support belief that 2015 is not necessarily a peak of profits, giving hope for future cash flows to fund both dividends and the substantial capex that lies ahead.
Overall, after early falls, the FTSE 100 finished 26.44 points higher at 6392.68, helped by an opening rise on Wall Street after a number of positive results, notably Citigroup.
But there were still worrying signs about the global economy, particularly in the eurozone, where the ECB and Germany still seem to be at odds in how to tackle the problems of slowing growth.
In Germany itself a key confidence indicator hit its lowest level since 2012, the latest in a series of poor sets of data from the country. Meanwhile the government cut its growth forecasts for this year and next, while in the eurozone as a while, industrial production fell 1.8% month on month.
And falling global demand led the International Energy Agency to slash its usage forecasts for next year, helping push Brent crude to a new four year low of £86.96, down more than 2% on the day.
Elsewhere UK inflation came in lower than expected, with the consumer price index hitting a five year low of 1.2% compared to expectations of 1.4%. Analysts said the figures made an interest rate rise in the near future less likely.
And markets are still jittery about geopolitical issues such as the situation in the Middle East, not to mention the spread of the Ebola virus.
Mining shares continues to provide some support after reasonable Chinese trade data on Monday, with Rio Tinto rising 73.5p to 3163.5p and Anglo American adding 35p to £14.23.
Among the fallers, Burberry dropped 54p to £14.25 after the luxury goods group said markets were getting tougher despite a rise in first half sales. Handbag maker Mulberry slumped 75.5p to 675p after the latest in a string of profit warnings.
If the crude price slide was good for airlines, it was bad for oil companies. Tullow Oil lost 11p to 518.5p and BP fell 5.3p to 426.65p.
Among the mid-caps, recruitment group Michael Page International was down 31.7p to 383.9p after it cut its full year operating profit guidance.
But AO World moved higher after a leading broker turned more positive on the the online domestic appliance retailer.
The company floated in February at 285p a share but has been well shy of that level ever since. They jumped 12.3p to 166.3p on Tuesday as Shore Capital moved from sell to hold, on the basis the shares had fallen so far they now met the broker’s valuation. Analyst Mike Stewart said:
AO has fallen 40% since we initiated on the stock with a sell recommendation and in our view the discrepancy between price and intrinsic value has not only narrowed but indeed disappeared.
When we initiated coverage on AO we were of the opinion that the core UK business was worth around 145p, some 10% below where the stock currently trades. We did, however, state that the intrinsic value of the whole group depends on whether or not investors believe Germany, a territory that the group has only recently started trading in, should be factored into the calculation. If it was, the value of the group would increase by an additional 30p (to 175p); broadly in line with the prevailing market price.
Sceptics would argue that we should not attach a value to Germany just yet however, despite the language site being live for pre-orders; this would imply that the fundamentals of the group do not support the current market price and there is still scope for a decline in the stock. Shore Capital does believe that the company will be able to replicate the UK model in continental Europe with the same degree of success but we are also indifferent when it comes to attaching a value to the territory. We are of the belief that investors should always opt to apply the most prudent method of valuation, especially when there is a large degree of risk and uncertainty attached to forecasts; this enhances the robustness of the margin of safety.
However, following two positive trading updates and a recent meeting with John Roberts, the founder and chief executive of the group, we have decided to upgrade our sales and earnings estimates. Consequently, we are now of the opinion that the core UK business, with fair value of 194p, can support the current valuation of the stock alone; investors should now view the prospect of Continental Europe as a free option.
Lower down the market, life sciences company ValiRx rose 4% to 0.38p after it received the final regulatory go-ahead for a clinical trial of its lead compound VAL201 in patients with prostrate cancer. In a buy note analysts at Daniel Stewart said:
The trial is structured to not only establish the safety of VAL201, but also to provide an initial measure of its efficacy. Such additional data will likely make the product more attractive to potential partners. Preliminary outcomes from the first cohort are anticipated during the first quarter of 2015.
