Sold IAG

Sold IAG.  Because:

• I'm not sure it can survive without a capital injection.  I think it can last 5 to 10 months (Jun to Nov), but the virus may have effects that go on for longer.   Even after the lockdowns are slowly loosened, and even if there is no second wave, it will be a long time before people are allowed to travel.
• I think the current market rally is a bear market rally.  Use the opportunity to sell.

Loss is around SGD 25K.  This was a hard decision:

• Can it survive without a capital injection?  Maybe.  Or maybe not.
• Would I buy it now?  No, because of the above.  I would not catch it as a falling knife.

Longer term, I would like to buy it again.  It may be at a higher price later.  Or it may be at a lower price after they raise capital.  I prefer to sell now and buy it with a clear head later when the risk/reward is better.

IAG: Can they survive?

Rough guess to see how long International Airlines Group can survive without raising capital.

Their balance sheet on Dec 2019:

• Current liabilities are 6.7bn.  Ignore deferred revenue as advanced ticket sales are refunded with credit and  no one cares about customer loyalty points when there are no flights.
• They have 2.2bn receivables.  Not sure how much they can collect.
• They said in March they have 9.3bn cash and undrawn credit.

Their biggest expense is employee costs.  I think it can be cut from 4.9bn to 2.6bn:

• Flights are reduced by 90%
• Under the UK Job Retention Scheme (JRS), furloughed employees' are granted 80% of their salary up to 2,500 pounds per month.  Spain's ERTE scheme pays 70% of the salary - the remainder is social security which may be delayed.
• IAG is paying 80% of their cabin and ground crews' pay through JRS (so IAG will have to pay anything above 2500 the pounds limit). And pilots agreed to take one month unpaid leave in April/May.  I think if it is still bad after this, the pilots need to continue on half pay, or else be let go.

So I estimate total operating costs at 5.9bn:

• 2bn for IT/property (no change)
• 2.4bn for staff
• 0.6 interest payments
• Operating lease 0.9bn (from 2018 - in 2019 it is lumped under D&A for IFRS16, but this is a cash cost that will still be there).

So I guess they can last 5 months (end June) to 10 months (end Nov), depending on how much of their receivables they can collect.

Bought shares in IAG

Based on the report at undervalued shares  (Its $50 per year to join).  Buffet bought into US airlines in 2016; the European airlines are not yet as consolidated at the US airlines were then, but they are expected to consolidate further.

Its trading at 7.5X earnings, a low valuation, with a reasonable leverage (and fleet age), and decent operating margins.

The main risk here is a US recession.  I guess a 50 percent chance of a recession starting in 2020/2021, else we get a slowdown and the recession comes a few years later.  I've bought a 5% position.

This is a long term buy-and-hold stock.  The only one I have found at a reasonable price in the last few years.  If it rises to a reasonable valuation (like 12 to 15 times earnings), I may sell to buy back in the next recession.

Bought 3213 shares at 7.594 Euros on BM last night.  I held off a while, waiting for the coronavirus impact on airline stocks...which dosen't seem to be happening.  Eventually I bit the bullet - at 7 and a half times earnings, just buy.