MTU Aero continues to perform well ahead of the major civil volume ramp-ups. The current year is being boosted by favourable FX and lower R&D. However, medium- to long-term growth is being embedded by an increased participation in both existing engines and current development programmes and in terms of original equipment (OEM) and maintenance repair & overhaul (MRO) services. While the current investment constrains near-term returns on civil OEM activity, both sales and margins should rise significantly over the second half of the current decade.
While Q3 sales modestly missed market expectations, this was largely due to the deferral of new civil engine deliveries (sales with zero margin contributions), resulting from a logistics issue at the prime partner. Adjusted earnings growth was slightly below H115, but remained in excess of 20%. The primary drivers for 2015 OE earnings remain the favourable development of exchange rates, as well as lower expensed R&D, but the civil OE segment (55% of 9M sales) continues to develop positively as investment milestones on new engine programmes are achieved. Military OE revenues (10% of 9M sales) fell by just 2% ytd. The civil MRO business (35% of 9M sales) saw organic growth of 3% translate into a 25% rise in sales due to the favourable FX development.
While Q4 is expected to see a c 25% sharp jump in zero margin new engine sales as deliveries deferred in Q3 are executed, the progress made to date implies the usual element of caution when it comes to management guidance. The conservatism relates to both the earnings outcome and cash flow performance. On the earnings front, the repeat of Q414 performance at the EBIT adjusted and net income adjusted levels would imply that guidance of €435m and €295m for FY15 respectively should be exceeded. Similarly, on the cash front, management does not expect any significant programme participation fees to be paid in Q4, and as inventory on new engines reverses on delivery, an outperformance of the high double-digit, year-end FCF seems likely (nine months saw an inflow of €139m). Consensus may rise modestly.
MTU is still a couple of years away from seeing earnings and cash flow growth accelerate as recent investments in new engines translate into more profitable aftermarket sales. The FY16 P/E remains modestly below its civil peers.