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13 Nov 2020
Strong re-rating leaves little room for positive surprise
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Strong re-rating leaves little room for positive surprise
- Published:
13 Nov 2020 -
Author:
Sanson Tristan ST | Lemarie Chloe CL -
Pages:
12
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....