IN­TER­NA­TIONAL CON­SOL­I­DATED AIR­LINES (IAG) 705.4P

Shares - - GREAT IDEAS UPDATES - (DS)

THE BRI­TISH AIR­WAYS owner still looks cheap de­spite a de­cent run for the share price since Oc­to­ber 2016.

The air­line trades on a mere 7.1 times forecast earn­ings com­pared to its peers which have an av­er­age PE of 12.67, in­clud­ing rivals such as

Ryanair (RYA) and Easy­Jet (EZJ). IAG also has an at­trac­tive 9.6% free cash flow yield.

While the air­line sec­tor is start­ing to re­cover from an in­tense price war, an­a­lysts have been wary of a range of risks in­clud­ing ris­ing fuel costs and the im­pact of Brexit ne­go­ti­a­tions.

Al­though IAG’s most re­cent full year re­sults, pub­lished in Fe­bru­ary, slightly missed ex­pec­ta­tions at the op­er­at­ing profit level, a sub­se­quent up­date shows a busi­ness in good health.

Its first quar­ter re­sults showed a 75% jump in op­er­at­ing profit to €280m, smash­ing con­sen­sus ex­pec­ta­tions of €206m and helped by favourable ex­change rates, the tim­ing of Easter and a con­tin­u­a­tion of im­prove­ments that be­gan in 2017. That news, plus a new €500m share buy­back, has helped to strengthen the share price.

The air­line is try­ing to ac­quire em­bat­tled ri­val Norwegian Air Shut­tle af­ter buying a 4.61% stake, but has al­ready had two ‘un­der­val­ued’ takeover offers re­buffed.

Norwegian runs ul­tra-cheap US flights from Europe but doesn’t make any money and is drown­ing in debt. IAG’s in­ter­est in the busi­ness looks like a mix­ture of de­fend­ing its own transat­lantic oper­a­tions from low cost com­pe­ti­tion, plus an op­por­tunis­tic move while Norwegian’s own val­u­a­tion is very cheap. (LMJ)

PUT SIM­PLY, Bar­clays is one of the cheap­est UK banks. Ac­cord­ing to data from Reuters, it trades on a price-to-book ra­tio of just 0.6-times, quite a bit be­low its peer group av­er­age of 0.9-times. How­ever its first quar­ter re­sults to 31 March go some way in ex­plain­ing the rel­a­tive cheap­ness of the fi­nan­cial in­sti­tu­tion, hav­ing recorded a pre-tax loss of £236m.

This loss was largely due to the cost of set­tling a his­toric case with the US De­part­ment of Jus­tice over the mis-sell­ing of mort­gage-backed se­cu­ri­ties. Bar­clays had to pay the US reg­u­la­tor £1.4bn to set­tle the mat­ter and a fur­ther £400m in re­la­tion to on­go­ing Pay­ment Pro­tec­tion In­sur­ance claims.

How­ever, if these mis­con­duct charges are stripped out, the bank’s pre-tax prof­its ac­tu­ally in­creased by 1% to £1.73bn. This was driven by a 45% im­prove­ment in im­pair­ment charges and a 6% re­duc­tion in op­er­at­ing costs.

A key sign of a bank’s prof­itabil­ity is its re­turn on tan­gi­ble equity (ROTE); last year Bar­clays posted a worst in class 1.1%. How­ever, for the first quar­ter of 2018 the bank’s ROTE was an im­pres­sive 11% when ex­cep­tional items such as lit­i­ga­tion charges are stripped out. Given that Bar­clays has now set­tled with the De­part­ment of Jus­tice the bank’s re­turn to prof­itabil­ity should con­tinue and its shares could re-rate.

How­ever, you should note ac­tivist in­vestor Ed­ward Bram­son re­cently ap­peared on the share­holder reg­is­ter with a 4.9% stake held via in­vest­ment ve­hi­cle Sher­borne In­vestors (SIGC).

Lit­tle is known about his in­ten­tions but me­dia re­ports sug­gest his pres­ence is un­wel­come given Bar­clays’ man­age­ment are fo­cused on re­viv­ing the busi­ness and could do with­out the dis­trac­tion of a share­holder who may push for big M&A deals.

As such, you should treat this stock as fairly high risk al­though you do get some com­pen­sa­tion in the form of a div­i­dend yield in the re­gion of 3.2% based on cur­rent year fore­casts, ris­ing to 4.1% in 2019 and 4.6% in 2020.

Those fig­ures are less gen­er­ous than the yields you could get from HSBC (HSBA) and Lloyds (LLOY), al­though they are ar­guably less risky in­vest­ments (rel­a­tive to the broader sec­tor) and so the po­ten­tial re­wards may not be as high as from Bar­clays if the lat­ter can re­ju­ve­nate its busi­ness.

ON PRICE-TO-EARN­INGS met­rics Strix trades at a rough 50% dis­count to peers, ac­cord­ing to Reuters’ data. Based on 2018 earn­ings es­ti­mates, Strix trades on a PE of 10.6, fall­ing to 9.8-times in 2019.

The com­pany de­signs and makes clever con­trols and safety de­vices fit­ted on many of the 70m ket­tles sold world­wide each year. They ap­pear on brands you should recog­nise in­clud­ing prod­ucts from Bosch, DeLonghi, Ken­wood, Rus­sell Hobbs and more.

Strix’s in­tel­lec­tual prop­erty-pro­tected de­vices are widely con­sid­ered best-in-class, demon­strated by long-term re­la­tion­ships with over 400 brands and re­tail­ers. It claims to have about 40% of global mar­ket share.

There are cheaper copy­cat de­vices avail­able but many main­stream vol­ume mak­ers stick with Strix and pay more be­cause they trust the equip­ment and are likely to avoid expensive prod­uct re­calls. That should help Strix de­fend 30% to 33% op­er­at­ing profit mar­gins.

Yet the wider ket­tle mar­ket is also grow­ing faster than be­fore, largely be­cause more af­flu­ent Chi­nese peo­ple can af­ford house­hold labour-sav­ing lux­u­ries. Be­tween 2012 and 2017 the mar­ket av­er­aged 5.6% growth a year but this pace is ex­pected to ac­cel­er­ate to 7%-plus through to 2020, say an­a­lysts.

Strix has gen­er­ated over £30m of ad­justed earn­ings be­fore in­ter­est, tax, de­pre­ci­a­tion and amor­ti­sa­tion (EBITDA) in each of the last 10 years, and is very cash gen­er­a­tive. That helps to fund gen­er­ous div­i­dends with the shares cur­rently yield­ing 5.4%, far higher than the 3.6% FTSE All-Share av­er­age.

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