Event in Progress:
View the latest research on other companies in the sector.
Parker Hannifin has announced its offer to acquire Meggitt for £6.3bn ($8.8bn). Parker, which operates in motion and control activities for Aerospace, has proposed a 70% premium to acquire the floating shares of Meggitt.
Meggitt PLC
A strong offer, based on cost synergies of c. 10% of pre-crisis Meggitt sales Meggitt and Parker Hannifin announced today a full cash offer for Meggitt by Parker, at GBp800 per share, unanimously recommended by Meggitt''s board. This attractive offer, valuing the group at c. 22x EV/EBIT 2023e, represents a c.15% premium to the pre-COVID peak and stands well above our expectation for a potential takeover price. This appears driven by expectations for USD300m in pre-tax synergies, representing c.10% of 2019 sales at Meggitt. Synergies would stem from supply chain, footprint optimization, and productivity and cost-savings initiatives. We note that this is among the most ambitious synergy targets disclosed in AandD takeovers over the past 5 years. We attribute this to a very complementary portfolio of products, and the ability to leverage both companies'' OE customers and MRO networks. The closing is expected in approx. 12 months, which explains the discount to the takeover price reflected in Meggitt''s share price. H1 results a mix bag but encouraging on Civil AM trends H1 results came in a touch below consensus expectations, with operating profit of GBP62m, 5% below consensus expectations, implying a slightly weaker margin than hoped at 9.1% for the group (vs. 9.4% expected). This appears largely driven by lower-than-expected Defence sales, with encouraging signs on the Civil AM recovery (sequential growth of 31% on sales and 40% in orders). The group also experienced some disruptions to its US facilities, already disclosed with its Q1 trading update - largely linked to staff turnover and quarantines. The guidance remains unchanged, with stable organic sales, higher underlying operating profit vs. 2020 and positive FCF. Valuation raised to the offer price, downgrade to Neutral We are comforted by Meggitt''s management comment on the Civil aftermarket outlook, hence leave our FY21 estimates and beyond unchanged. We increase our target price to the...
Meggitt shares have rallied - with reason - on two good pieces of news Meggitt shares have rallied over the past month, due to some reignition of takeover potential, as well as following the announcement from Airbus that it would firm up the rate of 64 on the A320. Together both bode well for consolidation in our view. Indeed, the rationale for players in the sector to hunt for cheaper stocks with synergy potential is further enhanced by the need to optimize the next leg of growth in the A320neo ramp. While the potential interest from Woodward, as relayed in the press, seems at best in the very early stages, we reiterate our view that Meggitt is a good consolidation candidate in the sector. Honeywell, RTX or private equity are other key potential acquirers. New A320 rates are positive for earnings and a likely turning point in consensus momentum With A320neo OE representing c. 5% of the group sales, the higher rates (going to 64 in 2023 as per Airbus'' firm plan, with slight increases beyond) have a 1% impact on sales, but should help fixed cost under-absorption from the COVID crisis to reverse more rapidly, triggering a 3% increase to our 2022-24 EPS. At this stage, we stand slightly above consensus on 2022-24 and feel some further margin improvement could materialise if the group executes well on the production ramp (especially on composites), and as it benefits from the recovery in its aftermarket annuity. We thus expect this news to be a turning point for earnings revisions, which should start firming up from on 2022 onwards. Valuation reintegrates MandA scenario, yielding our new GBp575 TP We reintegrate in our valuation method a takeover scenario, with a 25% probability and 30% premium to today''s share price. Our SOTP valuation method is otherwise unchanged, based on 2023 EV/EBIT, yielding a fair value of GBp547 on our updated estimates. Along with our MandA scenario, this yields our new target price of GBp575 vs. our previous SOTP-based...
Meggitt has proved it can be resilient in the pandemic as the results were encouraging for the mid to long term. There are still headwinds to be expected near term, as the sanitary restrictions do not seem to be vanishing any time soon.
Yes 2021 outlook is vague, but GBP210m likely to represent a floor on operating profit Meggitt provided a very general 2021 outlook of stable sales (although this seems to exclude some FX headwinds) and ''improvement in operating profit'', that seems mainly driven by a GBP20m yoy net cost saving. This would imply a floor to 2021 operating profit at c. GBP210m, assuming no volume recovery, with any increment aftermarket growth adding to this performance. While H1 remains tough, we expect the group to be able to post 5% growth in Civil aftermarket in FY21, as it benefits from some recovery in aircraft utilization - especially short-cycle wheels and brakes. Solid gross margin and potential mix benefit drive confidence in mid-term Prior to the crisis, Meggitt''s story was of margin expansion toward 20% thanks to mix improvement (faster aftermarket growth than OE) and self-help. We believe this story remains very much intact, with margin recovery likely to be faster in the early phase of the recovery as OE recovers at a slower pace. With our and consensus estimates pointing rather to a return to 2019 margins only, by 2023 we thus see mid-term estimates as largely de-risked, despite some short-term uncertainty. Bridge analysis shows path to c. 19% margin by 2025 In this note we illustrate how based on a 35% operating leverage, a limited mix benefit, the group appears well on track to reach a 19% margin by 2025. We believe this assumption is reasonably cautious as it stands below the group''s 2015-2019 gross margin of 36-40% and well below the c.53% experienced in 2020 (excluding costs savings). By 2023, we expect to see a return to close to 2019 margin, with our expectations only slightly above Visible Alpha consensus. Peers valuation suggests potential for re-rating, upgrade to Outperform Key peers Safran and MTU trade at 17-18x 2023 EV/EBIT, despite weaker margins and FCF yield making some intra-sector rotation likely. With the potential overhang...
Meggitt’s results were in line with expectations and the preliminary publication. The good surprise was the better cash generation than expected which, in our view, is a real asset for the group, proving its capability to adapt its operations quickly and efficiently. The guidance was roughly in line with the street. The group is now looking for a gradual recovery, which might not be linear.
Vaccine hopes triggered the first round of re-rating Since the beginning of the crisis, we had argued that Meggitt had faced a largely unwarranted de-rating vs. its key aftermarket peers Safran and MTU. While we remained cautious on the aftermarket potential in this downturn, Meggitt''s performance appeared to factor in concerns about both the recovery potential given its exposure to older fleets and about its balance sheet. Vaccine hopes and a return to being cash generative in Q3 have now triggered a significant re-rating for Meggitt, above and beyond what was experienced by Safran and MTU over the past week. It remains an underperformer YTD, but now more understandable given weaker cash performance in the downturn and no tangible signs of improvement seen in Civil aftermarket yet. But FY20 outlook leads us to cut 2020-22 estimates despite upbeat comments on recovery Still, given a weaker than expected starting point, explained by aftermarket trending slightly below the group''s base case, we now cut our 2020-22 EPS by 16%/10%/3% respectively. While management delivered an upbeat message on the potential for a strong aftermarket recovery once air traffic recovers, overall sales momentum in 2021 may still remain limited prior to a more pronounced rebound in 2022. The production outlook for the 737MAX has also been progressively delayed throughout this year, leading us to postpone some growth-and margin recovery-into 2022. No longer among our de-rated defensive names, cut to Neutral We had argued that Meggitt was among a basket of de-rated defensive names within the AandD sector, with concerns over its balance sheet and overall business outlook largely overdone. The recent communication from the group and vaccine news flow largely helped allay some of those. Following the re-rating, we are now back to this summer''s situation, when we saw hopes for an aftermarket rebound being outweighed as the second wave of the pandemic hit Europe....
The top-line performance was broadly in line with our Q3 expectations, and margins are expected to be lower in H2. This is driven by an adverse mix within the civil aftermarket, with airlines’ delivery deferrals of spare parts and the lower volumes across manufacturing sites. Meggitt reinstated FY20 guidance, with the group’s underlying operating profit marginally lower than expected, but the FCF guidance is maintained, and we believe the latter to be the most important metric to track this year.
Lockdowns rolled out throughout Europe: winter season likely very weak Overall in October, global flights volumes were stable month-on-month, and represented 58% of 2019 volumes (57% in October). However, we have started to see a pullback in late October, also recorded in the number of passengers going through US airports. So far, this appears in line with normal seasonality, but may well be exacerbated by recent restrictions and lockdowns rolled out in Europe and which may spread, along with the resurgence of cases. This is likely to translate into a very weak winter season for air traffic, especially for European airlines (easyJet sees 25% of Q4 19 capacity in Q4 20, IAG 30%). We believe the share drops seen last week reflected concerns about a second wave of the pandemic, but the latest lockdown announcements, notably in England, did not yield additional pressure. Yet Airbus deliveries remain solid, driven by a widebody catch-up Against this backdrop, Airbus deliveries held up solidly, and we forecast a total of 70 deliveries in the month, made up of 10 A220, two A320ceo, 42 A320neo, three A330neo, one A330ceo and 12 A350. This surprising catch-up from widebodies was driven by deliveries to Asian and Middle-eastern airlines (Singapore, Cathay, Kuwait and Qatar). Once again deliveries thus stood well ahead of first flights, our proxy for production - in line with the official monthly rates in October - and we estimate a reduction of c. 15 in the number of aircraft in Airbus'' inventory, to c. 120. 737 MAX production still at very low levels We also expect Boeing to have seen a modest reduction in its inventory, although driven by low production (only 10 aircraft performed their first flights last month). Within that, 737 MAX production continues to trickle on at an average of one per month since it resumed in June. Dassault Aviation well on track to reach guidance In the business jet segment, we note that Dassault Aviation is now only...
MGGT SAF AM AIR MTX
Airbus deliveries expected slightly above production, some catch-up on WB deliveries We forecast Airbus deliveries in September at 58, which would stand slightly above current production at 50-52. These 58 include 49 narrowbodies (42 A320neo, one ceo and six A220), and a catch-up in widebody deliveries at nine (seven A350, two A330neo), following low volumes over July-August. Neither specific orders nor cancellations are expected this month. Implications for Airbus Q3: easing volume pressures, inventory unwind on track Volumes in Q3 are clearly stronger than in Q2, with an expected 146 deliveries in total, down 36 aircraft yoy. Assessing the precise fixed cost under-absorption due to covid remains challenging but the typical volume/mix impact based on 2019 production levels would point at a low triple-digit million euro headwind yoy (vs. c. EUR1.3bn in Q2). Inventories also appear to have slightly fallen, as we tracked a total of 135 aircraft making their first flights in Q3, our proxy for production, implying a reduction of inventories by around 10 aircraft in the quarter. This is in line with the targets set out by Airbus management, with Q4 expected to see even stronger inventory reduction. Capacity growth has stalled - a concern for aftermarket names The average daily number of commercial flights in September has remained stable vs. August, and stood at 57% of 2019 levels (July: 49%, August: 55%). The recovery has thus stalled as we enter a challenging winter season with some resurgences of the outbreak while IATA just trimmed its traffic outlook to -66% change in RPK in 2020 (vs. -63%), due to what was a disappointing summer with weak load factors. In this context, many airlines have announced significant cuts to their winter schedules, weighing on sentiment for aftermarket names - with good reason we believe. 737 MAX getting close to its expected return to service The 737 MAX is expected to be recertified towards November,...
MGGT SAF DAAV AIR MTX
Solid H1 performance, debate around H2 momentum Meggitt''s performance in H1 was solid in our view, with margins down a limited 390bps, despite a 14% drop in sales. We note this was a challenging accomplishment given the limited benefit from cost saving measures in H1, notably with regards to headcount (2019 costs = 35% of sales). Given the lack of guidance, concerns arose on the scale of margin recovery in H2, as sales are arguably going to come in below H1 level. Uncertainty clearly remains around the strength and shape of the recovery but we expect the group to still be able to post a palatable 14.2% margin in H2 thanks to over GBP200m of PandL cost savings targeted for the FY. In addition overall short-term focus on H2 performance should shift towards mid-term recovery potential as we progress through the year. More visibility on aftermarket eases concerns on a retirement cliff The added disclosures on aftermarket are welcome, and show that the shift away from older platforms has already happened, with aftermarket from fleets over 20y representing only 15% of 2019 revenues (20% in 2016). We believe this exposure is largely driven by legacy regional, widebody and business jets, while the younger portion of the fleet, below 10 years, should be largely focused on narrowbodies. While recovering to 2019 Civil AM levels should take some years (we do not expect this prior to 2025), we would expect the bulk of lost sales to be recovered by 2022, along with a solid margin recovery close to 2019 levels thanks to cost-cutting measures. Joining the list of de-rated defensives, upgrade to Outperform Going into results we had concerns that margin performance might be weak in H1 and would trigger concerns about financial strength. This was further accentuated by press reports in August (Bloomberg) about a potential equity raise of up to GBP600m; Meggitt shares have underperformed key aftermarket peers Safran and MTU by 12% since late July. With...
Overall, the adjusted results were in line with expectations, while the activity remains severely disturbed by the civil aerospace business (with significant impairment charges recognised). Still, no guidance has been provided for FY20 (like several civil aerospace companies), although Meggitt has slightly tempered its FY20 FCF target, from “positive” to “neutral”; a negative consensus adjustment is therefore expected. Lartly, a positive note on liquidity, which remained strong and no fresh equity is needed after the fears this summer.
H1 trading update reassuring on cash, cost saving measures Meggitt''s H1 trading update proved reassuring, especially on the cash front, reiterating a target for positive FCF in FY20. With civil aftermarket and OE down 50% in Q2, Meggitt seems to have performed no worse than its main peers (Safran saw April revenues down 50% and expected a similar trend in Q2), which should allay some fears that Meggitt''s exposure to older aircraft would represent a major burden. Comments on cash savings being ahead of expectations on operating costs but offset by slower inventory reduction are also a net positive in our view, paving the way for a solid 2021 FCF. H1 detailed preview In this note, we provide a more detailed preview for H1 numbers, and expect sales of GBP877m (-15% organic), underlying operating profit of GBP86m (9.7% margin) and FCF of GBP(148)m. Estimates adjusted to reflect disposal, impairment in 2020 Changes to our estimates (EPS down 4%/7% over 2020/21) mainly reflect the Training Systems disposal with lower FCF in 2020 driven by more adverse working capital development in 2020, recovered in subsequent years. We also include GBP300m of impairments in 2020, representing c. 10% of the group''s intangibles, excluded from the underlying basis. Some rerating likely, we remain Outperform While yesterday''s performance was likely boosted by some short-squeeze, we believe Meggitt has potential for re-rating, with H1 results especially FY20 guidance a potential positive catalyst - we anticipate no significant changes vs. consensus - and if air traffic continues its recovery over the summer despite some concerns about the US. For this reason we slightly increase our valuation multiples, from 10.5x to 11x EV/EBIT, yielding our updated GBp375 target (vs. GBp320).
Meggitt issued its Q1 trading update, with group sales up by 5% yoy, driven by Defence, while civil aerospace showed signs of softness in the last few weeks. Still, Meggitt is taking radical steps ahead of what could be a major crisis for civil aeronautics.
Meggitt reported FY19 results that were slightly better than anticipated, but a couple of headwinds are expected for 2020, which may last, turning to more cautious guidance for 2021. At first, the 737MAX grounding is expected to continue to weigh on the margin in 2020, delaying margin expansion in 2021. Softer traffic in H2 19, expecting to maintain this trend, should result in lower Aftermarket business.
Meggitt has issued a trading update in which all divisions performed according to guidance except for Defence which did even better. On the back of this development, Meggitt upped its FY19 revenue growth guidance, while, at the same time, expecting a potential drag on the margins.
Meggit has reported a robust first half, mainly driven by Civil OE and Defense, enabling an upwards revision in its FY19 guidance. Meggitt is also making good progress on competitiveness, even appearing ahead of its initial plan in terms of footprint rationalization.
Meggitt reported FY18 results that were in line with the market expectation. Overall revenues are up 9% yoy on an organic basis and 4% as reported. Underlying EBIT was up 3.8% for a stable margin of 17.7%. By segment: Civil Aerospace, revenues grew by +6% yoy. Civil Aftermarket grew by +8% yoy. Defence, revenues grew by +10%. Energy, revenues were up by +19% yoy. Net income was £179m, down 39% yoy whilst EPS grew by 7% to 34.2p. Free cash flow conversion stood at £167.4m vs. £197.4m last year Dividend increased by 5% to 16.65p
Meggitt (Buy/26% upside) reported quite bright Q1 sales growth figures. The group was supported by civil aftermarket revenue growth (+8%) while the Original Equipment reported a revenue decline of 2% yoy. Consequently, civil aerospace grew organically by 4%. The group was also very well supported by the Energy division which reported revenue growth (+39%) on a weak comparison basis and a strong order book. Lastly, military revenues grew by a weak 2%, penalised by delays in fighter and transport aircraft brakes. On the back of these satisfying revenue figures, the group confirmed its FY guidance in terms of organic revenue growth (2-4% expected).
Meggitt has also reported its FY results, with a top-line slightly below our expectations but with a bottom-line in line with them on an underlying basis and well above our expectations on a statutory basis thanks to a tax credit this year vs a tax charge in 2016. The group announced, as we expected, a 5% higher dividend 5% for FY17. Lastly, it announced a quite solid operating margin guidance for the 2018 to 2021 period.
Meggitt reported quite lacklustre Q3 results with flat revenues yoy. Growth in the different activities was variable with 4% organic growth in civil aerospace driven by OE growth (+6%) but also by the aftermarket (+4%) but, conversely, the military activities saw a 5% decrease in organic revenues because of lower demand for spare parts. The latter activity is expecting to see a much stronger Q4. The energy activity continues to see a revenue decrease, though at a lesser pace.
Due to Meggitt not meeting our criteria of innovative/disruptive technology and engineering we are ceasing coverage. This will allow us to focus on those stocks where we feel we can add most value in this space.
Meggitt reported a ‘window-dressed’ set of figures for H1 17 with revenues growing by 9.7% on a reported basis but by 0% on an organic basis. The group was effectively strongly supported by currency movements. Details by activity show that the civil segment, producing the largest share of revenues, reported 1.8% organic growth (+13.7% reported), mostly thanks to the aftermarket (+2.4% org. and +15.3% reported). Inversely, the energy market reported a 14.1% decrease in organic revenues (-3.7% rep., and representing only 6.5% of group revenues) affecting the whole group and reducing total organic revenue growth to 0%.
Meggitt reported a rather weak trading update, which was negatively affected in the military division by the weak demand in the US. On the contrary, civil aerospace revenue rose by 3% organically, driven upward by both the OE and aftermarket performance (+3% organically each). The latter was supported by growth in business jets, while for OE, the growth came from large jets. Also, note that the group completed the acquisition of Elite Aerospace, a specialist in heat transfer, pneumatic, hydraulic and avionic components for both commercial and military aircraft (£14m of revenues in 2016). The group has maintained its FY guidance of organic revenue growth in the range of 2-4%. The company will provide further details at its CMD on 16 May.
Meggitt has not only released encouraging results, even though negatively impacted by a one-off loss, but has also raised its synergy expectations, while having passed the peak on R&D spending. Thanks to this, it expects a strong improvement in both the operating margin and cash flow generation.
Judging by yesterday’s share price reaction the market is again backing a management which without the benefit of high energy prices has delivered little apart from a deteriorating balance sheet. It is promising 2-2.5% group margin and in excess of £200m cash from inventory improvement by 2021 and more details of how many millions will be wasted to achieve this will be provided at a CMD in May. What the management failed to say loudly was that their Civil Aerospace businesses (like Senior) have so little bargaining power that the only competitive advantage they have is how much of their shareholders funds they are willing to gamble on Airbus and Boeing’s hubris. Forget higher 2021 margin targets, we doubt anyone in the executive team will be around then to explain why they failed. The immediate concern for investors is that the total cost of capex and freebies is set to explode. As net debt rises, even a small decline in expected aircraft deliveries will create a stampede to divest. SELL.
Since the October 2015 profit warning, the EPS consensus has been stuck a 34p despite the benefit of EPS-enhancing acquisitions and FX benefit which confirms our long-held view that underlying fundamentals continue to deteriorate. Yet the share price has increased by 29% thanks in part to Elliot buying over 5% stake in August 2016. Going forward, we estimate that EPS will resume its downward trajectory as there is little sign of improvement in the business jet markets and rising interest rates will make it harder for the management to use cheap money to buy earnings.
Meggitt has had a turbulent few years with numerous profit warnings and no organic growth since FY13. FY16 looks to be the start of the turnaround, with the recent Q3 trading statement indicating the company is on course to meet guidance for low single-digit organic revenue expansion this year. However, the company has some way to go to restore investor confidence. It was also announced that Rolls-Royce veteran Tony Wood is joining as COO, a boost to the Meggitt management team.
Meggitt released Q3 revenue globally in line with expectations, confirming its FY guidance previously announced but announcing the arrival of a new COO.
The end of equity is nigh. The IR is in hiding unable to explain the “6% organic growth”, which our calculations show was actually negative, or how the company will achieve 10% organic growth in Q4. The lack of any cash guidance is a clear sign that the ship is sinking with debt. We believe the management are desperately hanging on to their jobs as the sword of Elliott hangs by a single hair from a horse's tail over them. The privilege of dealing with the mess it seems will go to Tony Wood, who we believe was recently relieved of his duties as the boss of Rolls-Royce Aerospace and now has been appointed as COO of Meggitt as of December 1.
Honeywell last night warned that its Aerospace business will report an organic sales decline of 6% in Q3/16 compared with previous expectation of -1% to +1%. Margins in the division are expected to fall by 170-190 basis points versus previous expectation of 50 to 70 basis points. Honeywell is blaming Business jets, Defence and Space and increased OEM incentives for the cut in Aerospace guidance. We continue to believe that Meggitt will struggle to deliver low single digit organic growth for FY16 having generated -2% organic growth in H1/16. We move the stock to our Conviction SELL list as we expect a warning on organic growth on November 15 if not before.
Meggitt is now facing additional headwinds in its Civil OE business in addition to the loss of market share and falling margins evident in its H1/16 results in its newly acquired advance composites businesses. Bombardier’s warning on CSeries deliveries on Tuesday suggests that we may have underestimated the supply chain problems affecting PurePower™. This could not only impact Meggitt’s ability to deliver its low single digit organic growth target for the 2016, but may also impact margins due to delays, complexity of the technologies and product modifications. We have also taken this opportunity to restate our forecasts based on forthcoming accounting changes in 2018 whereby programme participation costs are no longer expected be capitalised. This reduces our 2016-18 EPS forecasts by 8-11%.
The interims confirmed the two fears we had highlighted in our April note. First, the profitability of the aircraft braking systems business is being hurt badly by recycling, including in sole source platforms. Expect impairments of capitalised costs. Second, the acquisitions of advanced composites businesses are losing market share within six months of ownership and its operating margins are also sliding, which means value creation within three years is now even further out of reach. In addition to these issues, we now believe that the Civil OE business is also going to disappoint as the airline industry cannot sustain capacity growth. FX movements may have allowed the company to avoid a profit warning yesterday but another October warning is now looking increasingly likely. The balance sheet is looking precarious at 2.8x net debt/EBITDA. Net debt has grown from £575m at the start of 2015 to £1.28bn by end-June 2016, which has returned negative organic profit growth. Reported profits are flat but only thanks to FX. SELL, target price 434p.
Yesterday, Dassault Aviation cut its delivery forecast for Falcon business jets by 17 %. It now plans to deliver 50 Falcon jets in 2016 down from a previous target of 60 and 55 deliveries in 2015. The company is blaming geopolitical uncertainty, ample availability of second-hand planes and strong pricing pressures across the whole range, with Bombardier being particularly aggressive. Meggitt provides wheels and brakes for Falcon 7X and 900LX. We believe this is another potential source of profit warning on top of the recycling pressure in aftermarkets and the unsustainable margins in advanced composites businesses we highlighted in our 18th May, 2016 research note.
The shares have recovered 15% since the profit warning in October last year. The management has boosted the rate of investment to counter the profit decline. However, we expect further profit warnings and are moving our recommendation from HOLD to SELL. We believe the two main sources of expected profit growth – advanced composites and aircraft braking systems – will fall short. Our research highlighted in this note has shown that (1) exceptionally high pro-forma margins of the acquired advanced composites businesses could prove illusory, given the lack of clear differentiation and volatility in the supply chain; and (2) competition from recycling is also impacting sole source platforms in aftermarkets. We have cut our EPS forecasts by 7% and 17% respectively for 2016 and 2017; our new EPS forecasts are now 8% and 14% below consensus. With post-tax ROCE falling from 14% in 2006 to just 7% in 2018, our economic value added model now generates a target price of 325p (363p). We downgrade our recommendation to SELL.
Meggitt experienced a marked deterioration in Q3. Organic growth in civil original equipment continued with the segment growing +2%, however this was more than offset by a weaker than expected performance in the civil aftermarket (0%), military (-2%) and energy (-16%) markets. Overall, the group saw revenues decline by 1% organically in Q3. Worryingly, profitability in Q3 will be more impacted by the negative mix effect. Both military and civil aircraft aftermarket sales were lower than anticipated. In the same market, OE sales were also impacted by lower volumes and a number of programme deferrals which are expected to have a direct impact on margins. The evident weakness in the energy market beyond the expected organic decline is putting pressure on margins. Meggitt believes that the trend described in Q3 will continue in Q4 and that as a result the underlying operating profit for 2015 will stand well below the pre IMS current consensus of £369m (we have £365m). Despite this, the company remains confident of its cash generation conversion from operating profit, however the decline in the latter means that the company expects its gearing to stand above the guided level of 2.1x net debt/EBITDA. As a result, Meggitt has increased its cost reduction initiatives and is looking to reduce its employee base by c.300 (2.8% of the workforce) by Q1 16. The restructuring costs will be provisioned for in the 2015 results.
Another profit warning from Meggitt has come somewhat out of the blue. The sharp fall in H2 expectations combined with a lack of clarity over the outlook in FY16 leaves the market in the most unwelcome position. While we suspect that little has changed structurally for the investment case, and many of these issues are likely to prove transient, until a firmer outlook is provided the share price is likely to remain subdued. Any year-end trading update thus takes on greater significance than usual.
The CEO is keen to emphasise that today's profit warning stemmed from short-term invisibility, long visibility remains good. However, given today's warning was primarily due to spares sales to older aircrafts we would argue that long-term predictability is also impaired. Strategically, this could mean a fundamental change in the current business model of giving away OE to build long-term annuities. A more balanced and transparent OE/AM cash margin mix would be welcome and the recent acquisitions will help in this respect. However, over the next two years, Meggitt is already committed to heavy cash investment in next-generation aircrafts, which together with uncertainty on high-margin aftermarket sales will contribute to increased volatility in earnings expectations and pressure on balance sheet.
We note speculation that both United Technologies and Honeywell are considering making an approach. However, both combinations would lead to around 50% share of the wheel and brake market, and are likely to be referred to anti-competition agencies.
Share: