IAG climbs as Iran deal bolsters airlines

Wider London stocks drift higher on the low blue-chip volume

British Airways owner IAG has already doubled this year. Analysts reckon more is to come.

With airlines bolstered by Iran’s deal to limit its nuclear programme, IAG climbed 2.8 per cent to 372.8p. That recouped some of the stock’s fall last week after a capital markets day provided few surprises beyond pushing out the timing of cost savings in Spain.

However, since IAG is currently negotiating new salary caps with Iberia unions, dealers were seeing management’s guidance as deliberately downbeat.

A second round of cuts at Iberia, potentially agreed before the end of the year, would be “a milestone that could reset 2015 expectations higher,” Morgan Stanley said in a note last week.

Returning Iberia to its mid-2000 levels of profitability would boost IAG’s 2015 earnings to €2.2bn, against current guidance of €1.8bn, Morgan Stanley said. If that can be achieved, IAG would be trading at just 6.2 times 2015 earnings, said the broker.

Jefferies analysts were also positive on IAG, with an upgraded target price of 410p, though they expected the stock to pause ahead of news on the Iberia restructuring.

EasyJet, up 2 per cent to £14.34, was helped by a Jefferies upgrade to “buy” as part of the same research. EasyJet’s competitive position looks secure and last week’s special dividend should be taken as a positive signal on capital discipline, it said.

The wider market drifted higher on the lowest blue-chip volume since May Day. The FTSE 100 rose 0.3 per cent or 20.32 points at 6,694.62.

Babcock dropped 3.1 per cent to £12.84 after confirming a report that it was in talks to buy a stake in Avincis, a £1.5bn-valued helicopter operator. Panmure Gordon, Numis Securities and Investec all advised clients to use the uncertainty as a reason to take profits, given Babcock has already jumped 32 per cent so far this year.

Chemring rallied 9.6 per cent to 213p after the flare maker said that, since a profit warning in October, trading had stabilised as issues around the US government shutdown had largely been resolved. Management also flagged up potential disposals to strengthen its balance sheet.

IP Group was squeezed higher by 13.8 per cent to 180p, with more than three times the average daily volume changing hands. The tightly held intellectual property fund has been in focus following last week’s flotation of one of its investments, Applied Graphene Materials, which trebled in three days. Applied Graphene drifted 7.2 per cent to 435p.

Essar Energy dropped 13.2 per cent to 87.4p after posting an unexpected net loss at the half year, caused largely by one-off financial expenses. Essar’s power business was the main disappointment operationally, with construction of its Indian power plants delayed and disappointing demand at the ones already completed.

TalkTalk edged 1.2 per cent higher at 269.2p on a retread of speculation that it might be a takeover target for Vodafone. As usual, people familiar with Vodafone gave the theory no encouragement.

Hikma Pharmaceuticals edged higher by 0.2 per cent to £12.08 even after management gave a cautious briefing to UBS’s sales team. The drugmaker said regulators had not yet set a date to visit its New Jersey generics factory, where production has been suspended due to compliance problems.

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