Credit Suisse talks up Aer Lingus potential at IAG, sees substantial upside

LONDON (ShareCast) - Credit Suisse (NYSE: CS - news) has maintained its 'outperform' rating for airline conglomerate IAG after its proposed €1.4bn acquisition of Irish carrier Aer Lingus (Other OTC: AELGF - news) received the green light from the Irish government. The bank said that it continues to see the acquisition as "strategically positive" for IAG, which already owns the British Airways, Vueling and Iberia airlines.

It expects Aer Lingus to meet IAG's goals - 12%+ return on invested capital and an improvement to a 10-14% operating margin from 6% in 2014 - adding 6%, or €200m, to IAG's earnings before interest and tax by 2020.

Credit Suisse highlighted Aer Lingus's 3.5% share of Heathrow slots - adding to IAG's 52.7% - which should complement the latter's transatlantic business via its Dublin hub as well as expand its UK footprint.

The acquisition should also "inject further low cost/value DNA into the group to supplement Vueling and Iberia Express, making sustainable BA and group short-haul profit increasingly credible in our view", the bank said.

Credit Suisse said that with IAG boasting a free cash flow yield of 8% on 2015 and 2016 estimates, the stock is "considerably undervalued".

It has kept a 750p target price for the shares, which suggests 38% upside potential from Tuesday's closing price of 544.5p.

The stock was up 1.4% at 552p on Wednesday morning.