Why IAG shares could be worth 40% more

Possible upside of 40% has been flagged on International Consolidated Airlines Group SA (LSE:IAG) shares after a City bank said the growth potential of the BA and Iberia owner’s loyalty business had been overlooked.

Panmure Liberum has told clients that the FTSE 100 company’s overall valuation had “disconnected from fundamentals” on 6.5 times forecast 2027 earnings.

• Invest with ii: Top UK Shares | Share Tips & Ideas | Cashback Offers

Reiterating a price target of 620p, the bank said: “We have repeatedly argued that IAG’s valuation is wholly inconsistent with its financial performance, and its record of sustainable shareholder value creation and cash generation, in particular.”

IAG’s shares were 457.3p on the eve of annual results on 27 February, when IAG posted an operating margin at the top end of 12-15% medium-term guidance.

The share price performance continues to be driven by geopolitical events and the outlook for jet fuel prices, having fluctuated between 342p in mid-March and 482p at the end of June. They were 440p today.

Panmure Liberum’s report focused on the “implied undervaluation” of IAG Loyalty, which includes the Avios currency operation used by BA, Iberia, Aer Lingus, Qatar Airways, Finnair, Vueling and Loganair.

More than 70 million members worldwide collect and spend Avios across IAG’s partners spanning travel, retail and financial services. The scheme was founded as Air Miles in 1988 and evolved into Avios in 2011.

The Loyalty arm also encompasses the package holidays brands of British Airways and Iberia, with a portfolio of over 10,500 hotels across more than 600 cities in 100 countries.

• Stockwatch: time to buy the drop at this market leader
• Fund Focus: four questions to ask Scottish Mortgage
• Trading Strategies: a FTSE 100 share worthy of far higher valuation
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Avios and the holidays unit are both asset-light business models that offer high returns on capital and faster growth potential than the group’s airline businesses.

IAG highlighted Loyalty’s increased importance at a presentation to City analysts in June, when it disclosed a medium-term target for one billion euros (£848 million) of operating profit.

That compares with a profit of 548 million euros in 2025, which was more than double 2019’s level and 11% of the group’s total. A margin of 20.7% is above IAG’s average of 15%.

IAG Loyalty increased its active customer base by 10% in the last year, when growth was driven by new members collecting Avios from existing IAG partners. It also renewed its two largest non-airline partnerships in 2025 through American Express and JPMorgan Chase.

Panmure Liberum believes that the fundamentals of the division point to a significantly higher valuation multiple than IAG’s airline operations.

It said the read across to a recent sale by Air Canada of a minority stake in its loyalty scheme implied IAG Loyalty is worth nearly 50% of IAG’s current enterprise value.

The bank added: “Another way of looking at IAG Loyalty is as a source of earnings that is either absent at competitors or growing more quickly due to IAG’s more focused strategy in this area.

“As such, it is a source of persistent competitive advantage and superior financial returns, which should be rewarded with a premium valuation multiple relative to peers.”