With double-digit sales and EBIT growth supported by a record order backlog and defence budgets in key markets still on the rise, valuation looks undemanding at 9x P/E 2023e. However, the taxonomy debate has started to weigh, and is expected to gain in importance, not only in the EU. Against this backdrop a rerating looks unlikely. We downgrade to Neutral with a new EUR110 TP.
The business fundamentals look compelling ...
At first glance RHM offers a compelling investment case based on a 1) a record order backlog of EUR14bn at Defence (~4x FY21e sales); 2) the Civil Business'' strong exposure to hybrids and PHEVs that could stand for ~2/3 of divisional sales by FY25e (FY21e: ~1/3), 3) corporate action potential beyond the still pending Pistons exit, and 4) potential higher cash returns to shareholders.
... which is not yet fully reflected in consensus
Our updated model points to sales and adj. EBIT CAGR 2021-24e of 10%/12% with our 2022/23e adj. EBIT sitting 6%/8% above VA consensus. We expect consensus to move upwards over the next few weeks. FY21 results are due on 17 March, but the group already reported preliminary FY21/Q421 adj. EBIT 4%/8% ahead of expectations on strict cost control and favourable mix.
Rising ESG concerns have driven a ~25% derating since Q4 2020
Defence companies with a high exposure to Europe have derated 20%+ since Q4 20 on rising ESG concerns closely linked to the taxonomy debate. RHM''s 12M forward PE suffered a ~25% contraction to c10x for FY22e from c14x historically. In this regard, its Weapon and Ammunition segment contributes ~20%/30% to group sales and EBIT.
Downgrade to Neutral - our new EUR110 TP implies a 25% ESG discount for Defence
Our 11% adj. EPS CAGR 2022-24e is broadly in line with defence peers. While the debate around the sector''s classification as socially harmful is ongoing we think that the ESG discount is unlikely to disappear. Our revised EUR110 TP (vs EUR130) implies 10x 2023e P/E. With a...
