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New TP of 215p and we reinstate our Buy recommendation (from Under Review) – We continue to base our TP on a 17x EV/EBIT on FY26E.
Senior plc
Current commentary suggests stronger Aerospace momentum may not carry through to FY26E. Absent this, Flexonics softness implies downgrades are likely. We move to Under Review (from Buy, 225p TP).
Initiate coverage with Buy rating, 225p TP offers c.15% upside – There is longer-term optionality around further margin improvement, in our view.
Senior has confirmed that overall trading has been in line with expectations through Q1 and the Group remains on track to deliver further strong growth in FY24E. Our unchanged estimates look for 27% YoY PBT growth in 2024E, with a further 32% growth in FY25E driven by Aerospace as it recovers post
Senior has signed a five-year contract extension with Spirit AeroSystems, valued at c. $130m for precision structural components on Boeing aircraft programmes. Ahead of Senior's Q1 trading update tomorrow, this contract demonstrates further positive momentum as Aerospace recovers post the pandemic,
The Group has reported a strong performance in 2023, with adjusted operating profit up over 60%, driven by strong demand across its core markets. Whilst Land Vehicle demand is expected to moderate this year, we expect continued recovery in Civil Aerospace volumes, and robust demand in Power & E
Senior has announced two significant new contract awards for Airbus, utilising their low-cost facilities in Malaysia & Thailand. The latest awards build on recent 12-year extension for Rolls-Royce and 7-year contract with Strata, a new customer for Senior Aerospace. These demonstrate continued
The trading update has confirmed that demand has remained robust in H2 across the Group’s key end markets and full year expectations are unchanged. Whilst mindful of the potential moderation in Land Vehicle demand in 2024, we expect the continuing recovery in Commercial Aerospace build-rates and po
Senior has announced that its subsidiary, Senior Flexonics Crumlin, based in South Wales, has secured a production order for Battery Cooling Plates with Valmet Automotive GmbH, the battery module supplier for a new electric hybrid prestige Italian car marque. The contract is an important validation
Senior has announced a 12-year Rolls-Royce contract extension, commencing in January 2026, that underpins a significant proportion of one its Aerostructures businesses, ahead of a possible disposal. Despite ongoing aerospace supply chain challenges, we continue to see material share price upside as
The H1 performance was well ahead of our expectations, with continued strong momentum across the Group’s core markets, and a material improvement in Flexonics margin, which heavily de-risks FY expectations. We continue to expect a material increase in Aerospace revenues and margins over the next tw
Ahead of the interims results on 31st July we have updated our model to reflect recent FX movements and divisional profit mix, anticipating continued strong momentum within Flexonics and on-going supply chain challenges in Commercial Aerospace in Q2. We're confident the Flexonics outperformance can
We are discontinuing coverage of Senior. Our last published recommendation was Buy and our target price was 175p.
The Q1 trading update confirms continued strong demand in each of the Group’s key end markets, and the Group is well positioned for the steep recovery in Commercial Aerospace expected by 2025. Although we keep our forecasts unchanged, we see upside risk through the year, if commercial aerospace bui
The final results are slightly ahead of our expectations, with a healthy outperformance from Flexonics and successful pass-through of cost inflation through the year. Whilst we remain conscious of the near-term risk of supply chain disruption within the Civil Aerospace industry, we are increasingly
The shares have jumped 27% over the last four weeks, following a positive post-close update, that reported strong momentum in Flexonics in Q4. Whilst we remain conscious of the near-term risk of supply chain disruption within the Civil Aerospace industry, we are increasingly confident in the medium
Although supply chain challenges persist within the Civil Aerospace industry, there is growing confidence that the sector can recover to pre-pandemic production rates over the next three years. We expect the combined A320/737 MAX production grow at c.20% pa over the next two years, surpassing the 2
The strong recovery in Civil Aerospace production, led by single-aisle platforms, and continued strong demand within Flexonics has sustained strong momentum through H2, in-line with management expectations. We have updated our FY2022 forecasts to reflect this H2 performance and the lower tax rate t
Momentum and visibility A short period of reflection post the reporting season has seen Senior rise much higher up our preferred stock list. We were already fans, but a really excellent working capital performance highlighted a level of purpose that is encouraging given the company’s clear momentum and visibility. The current valuation already anticipates an element of this, but we can see a scenario where the company returns to earnings levels achieved in 2018/19 of 15.9/16.1p. Further, we do not see it as unrealistic for this to be a stepping stone to the 2012-15 range of 17.8-19.8p. We reiterate our Buy recommendation and 175p TP. Harry.Philips@peelhunt.com, Henry.Carver@peelhunt.com
Platform in place, delivery on the way The current share price might be below the 200p offer from Lone Star in June last year, but the building blocks to generate the targeted 13.5% ROCE and beyond are now securely in place. We are confident that this will enable the company to generate value considerably beyond the 200p level in the medium term, hence our continued Buy recommendation. However, we have trimmed our target price from 221p to 175p to reflect a twelve-month forward view. The recovery profile is best demonstrated in our 2022E revenue forecast of £740m compared to the 2019 pro forma number of £1,062m. Harry.Philips@peelhunt.com, Henry.Carver@peelhunt.com
The outlook for commercial aerospace production is improving, with global air traffic volumes bouncing back, led by domestic and short haul routes and the expected ramp-up in 737 MAX production in early 2022, but it's not yet clear when margins will recover to pre-pandemic levels. We have reduced o
Yesterday’s capital markets day focused on how the Group is leveraging its existing IP portfolio in fluid conveyance and thermal management technology to capitalise on opportunities in electrification and hydrogen power across three key market segments. Timelines vary, but the drive to decarbonise is clear. Management expects it can maintain or even increase its value proposition in these areas. A ROCE target of at least 13.5% medium-term is maintained. Strong IP in fluid conveyance and thermal management… Yesterday’s CMD showcased two of Senior’s 26 operating businesses: Metal Bellows: c10% Group revenue (FY20), c18% addressable market share, 69% Return on Trading Assets (1H21). As a leader in the design and fabrication of highly-engineered bellow devices and components, Bellows appears well positioned to exploit and expand IP across several end markets, supporting a targeted annual growth rate of 6%. We note current strength in semiconductor markets which appears likely to persist given global supply chain realignment, supporting capex. Flexonics Pathway: c5% Group revenue (FY20), c17% market share, 194% ROTA (1H21). As a manufacturer of expansion joints, Pathway has strong IP in fluid conveyance. Sales today are split roughly 1/3rd petrochemical, power generation and industrial end markets (petrochem having been c46% in 2015). The ability to meet the size and complexity of some projects is a competitive advantage, albeit orders can be lumpy. As a leading innovator in Catofin applications, which convert propane into propene and hydrogen, Pathway should be well placed for what appears to be a recapitalisation cycle in this area, and Small Modular Reactors should be a new growth market as nuclear looks set to become a significant part of the energy mix. … key for the energy transition across end markets Technology development creates opportunities in electrification and hydrogen power across three key market segments: Land Vehicle: Thermal management and fluid conveyance for battery and power electronics cooling, hydrogen fuel handling. Aerospace: Applicability of IP across all proposed technologies, including BEV/Hybrid, H2 fuel cell, H2 combustions, SAF. Power & Energy: CO2 regulation will create disruption. IP deployment opportunities in electric and hydrogen energy storage. Continued overleaf…
If structural growth in air traffic was the answer, then Senior would never need to host a Capital Markets Day (CMD) or defend itself from a bid. However, in yesterday’s second CMD in two years we heard the familiar message that as volumes recover not just in civil aircraft but also land vehicles there will be a strong pick up in EBITDA, which consensus is expecting to rise by 42% in FY22. We question whether the Aerospace supply chain can simultaneously deliver higher production rates and pass on the rising costs. If there is a plan that will “future proof” the business for the next downturn and underpin a long-term investment case, then it wasn’t shared. Whilst we recognise that an offer at 200p per share was rejected in June, we believe the outlook has deteriorated since then and that a similar offer is unlikely in the next 12 months. With the recent rise in sector multiples, we now value the shares at 13.3x FY22E EBITDA, equivalent to 158p (103p). With no further upside, we move our rating to SELL.
11- 15 October 2021
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Trade buyers could potentially pay >£3 for Senior Post Lone Star’s failed £2 bid, and M&A activity in the UK Aerospace & Defence sector heating up, we have taken a closer look at the potential price a synergy-capable trade buyer could pay for Senior. We conclude that >£3 is possible, and highlight a potential offer price of 303p (=74% upside), which would be possible if an acquirer could achieve 4-5% of sales in synergies, and be prepared to pay 10x FY25E EV/EBIT post synergies (=6.5x EV/EBITDA). On our current forecasts Senior trades on FY23E/24E/25E PERs of 20.3x/15.6x/12.5x. Jolyon.Wellington@peelhunt.com, Henry.Carver@peelhunt.com, Harry.Philips@peelhunt.com 3-page note
1H21: “Clear signs of recovery in end markets” Senior’s 1H21 PBT is ahead of expectations and management is positive regarding the projected recovery trajectory coming through, kicking off with a doubling of 737 MAX build rates from 16 to 31 per month by early 2022. Cash flow is also a highlight, driving leverage down to 2.0x, and leads to an upgrade to our Quadrilogy Matrix based valuation, to 221p, offering a potential 26% upside to current levels. On our forecasts, Senior trades on FY23E/24E/25E PEs of 19.2x/14.6x/11.7x. Jolyon.Wellington@peelhunt.com, Henry.Carver@peelhunt.com, Harry.Philips@peelhunt.com, Afonso.Osorio@peelhunt.com
1H 21 post close; trading ahead of management expectations Senior says 1H 21 trading has been ahead of management expectations, and overall we upgrade our FY21E forecasts, from a PBT of -£9.9m to -£5.0m, with our outer year estimates unchanged. We recently upgraded Senior to a Buy rating with a 212p target price, based on our view that the group can get back to FY19 profits on a LFL basis by FY25E, with the share price not reflecting this upside potential. On our current forecasts the group trades on 19.1x/14.5x/11.6x FY23E/24E/25E. Jolyon.Wellington@peelhunt.com, Henry.Carver@peelhunt.com, Harry.Philips@peelhunt.com
Commercial aerospace sentiment has improved sharply over the last month, with a growing confidence that narrow-body production rates will ramp up sharply through 2022, as excess inventories are depleted, and its hoped that wide-body demand will ultimately recover with long-haul traffic, as the glob
A path to 200p+ per share if earnings recover Now that Lone Star’s bid has failed, we take a fresh view on Senior, its markets and prospects. We conclude that a recovery is likely in its civil aerospace markets and if the group achieves its stated return metrics, profits would recover to FY19 levels on a LFL basis by FY25E. On this year, we value the group using a quadrilogy matrix, yielding a 212p valuation (271p pre discounting back), 40% upside from here. At the current share price, the group trades on FY23E/24E/25E PEs of 18.2x/13.8x/11.0x and EV/sales of 0.94x/0.86x/0.77x. We have upgraded our recommendation from Hold to Buy. Jolyon.Wellington@peelhunt.com, Henry.Carver@peelhunt.com, Harry.Philips@peelhunt.com, Afonso.Osorio@peelhunt.com 10-page note
Revised 200p bid but see balanced risk/reward at 170p We put out a note 10 days ago arguing that there is a narrow window for a deal to be done at 200p and, after seeing Lone Star upgrade its final offer to 200p, we stand by this view. However, with the share price at 170p, and with no guarantee a deal will be done, we are reducing our rating to Hold – with more downside in the event of “no deal” and more limited upside to 200p, we would not advise clients to chase the shares here. The proposed offer price of 200p values Senior at 16x FY25E PE and 12x EV/EBIT where our FY25E EBIT is 83% recovered vs FY19A. Jolyon.Wellington@peelhunt.com, Henry.Carver@peelhunt.com, Harry.Philips@peelhunt.com, Afonso.Osorio@peelhunt.com
Narrow window for deal, but currently favourable risk/reward After assessing Senior’s current situation, we relaunch coverage with an Add rating and a 168p probability-weighted target price. The market is currently assuming that no deal is more likely and, while we are far from certain, on balance, we see a window for a deal to be done at c.200p. At this price, significant upside would result, with more minimal downside should a deal not be reached, hence we see positive risk/reward. Jolyon.Wellington@peelhunt.com, Henry.Carver@peelhunt.com, Harry.Philips@peelhunt.com, Afonso.Osorio@peelhunt.com 5-page note
176p offer rejected Senior confirmed today that on 21 May 2021 it rejected a third conditional proposal from Lone Star regarding a possible cash offer at 176p per share. Subsequently, post this announcement being made public, Senior’s share price has risen and has closed 34% higher on the day. Corporate actions are beyond the scope of our current valuation, hence we are placing both our target price and recommendation Under Review. Jolyon.Wellington@peelhunt.com, Henry.Carver@peelhunt.com, Harry.Philips@peelhunt.com
We remain cautious on the prospects for a recovery in Commercial Aerospace demand and although Flexonics is expected to rebound strongly this year, the supply chain disruption experienced in the first half may temper the rate of recovery for the full year. We maintain our 120p target price and Hold
Q1 trading in line with market expectations Senior’s Q1 AGM trading statement was overall in line with market expectations. Positively, it has completed the disposal of Aerospace Connecticut for $74m, reducing net debt by a third. We are reducing forecasts 14/10% in FY22/23E, reflecting a slightly slower recovery trajectory, and trimming our TP from 128p to 122p. However, we still see upside, as earnings start to build back towards prior levels over the medium term, with the balance sheet in a stronger position, and reiterate our Add. Jolyon.Wellington@peelhunt.com, Henry.Carver@peelhunt.com, Harry.Philips@peelhunt.com, Afonso.Osorio@peelhunt.com 3-page note
Q1 trading update Trading in Q1 was in line with expectations. The company’s market assumptions for FY21 remain unchanged; based on these assumptions, guidance remains unchanged. End market colour: Certain domestic aviation markets have seen improving trends, albeit the outlook for narrow and widebody production rates remains unchanged, with production rates for narrowbody to recover to pre-pandemic levels sooner that widebody rates. Well-publicised supply constraints around semiconductor devices, steel and freight have caused some disruption throughout the supply chain during Q1 and are likely to continue to be a constraint in Q2. Upstream oil and gas markets continue to be challenging in the near term as expected. Defence and semiconductor equipment, increasingly important markets to Senior, remained healthy through the period. Divestiture The divestiture of Senior Aerospace Connecticut, announced 5 March 2021, was completed on 22 April 2021. Net cash proceeds are $68m or £49m. We note that company-compiled consensus FY21 adjusted Loss Before Tax of £6m does not fully reflect the divestiture. Balance sheet Net debt at the end of March 2021 was £220.8m (including capitalised leases of £75.8m) with £140.6m of headroom on committed borrowing facilities. In April 2021, the Group refinanced its US revolving credit facility of $50m (£36m) and extended the maturity by a further 12 months to June 2023. Our view The path to margin recovery for Senior will be longer than for others, while the shares have staged an impressive rally since the H2’20 lows, suggesting upside will be easier found elsewhere from here. Sell.
The near-term outlook for Civil Aerospace remains bleak but there are more optimistic signs of recovery within Flexonics and the imminent disposal of the Senior Aerospace Connecticut will significantly reduce the balance sheet leverage. In anticipation of this disposal, we have increased our target
Long-term recovery yields value – upgrade to Add FY20 was in line, and we make limited absolute changes to FY21-23E. However, post the disposal of Aerospace Connecticut for 14x FY19 EV/EBIT, reducing net debt by c.40%, and the updated outlook, with management expressing confidence that the MAX production increase will deliver momentum from FY22E, we take a longer-term view. We now forecast the group getting back to £1bn sales in FY25E, and switch our valuation methodology: using 11x FY25E EV/EBIT (equal to 90% of FY19 EBIT), discounted back to our 128p target price, which even after a strong run offers 10% upside. Jolyon.Wellington@peelhunt.com, Harry.Philips@peelhunt.com, Henry.Carver@peelhunt.com, Afonso.Osorio@peelhunt.com 8-page note
FY20 in line with expectations; FY21 to be “broadly similar” Senior reported FY20 results this morning, which were in line with expectations, with the group delivering an adj. LBT of -£6m, vs our forecast of -£7m, and consensus of -£9m. We would regard the outlook and recovery slope as being far more important than the results at this stage, with most investors being well aware of the challenging market conditions currently. Overall, for 2021 the group expects performance to be “broadly similar to 2020”, which would be a downgrade to consensus. Senior trades on a FY21E/22E EV/EBITDA of 11.2x/8.1x. Maintain 92p target price and Reduce recommendation. Jolyon.Wellington@peelhunt.com, Henry.Carver@peelhunt.com, Harry.Philips@peelhunt.com, Afonso.Osorio@peelhunt.com
The near-term outlook for the commercial airline industry remains bleak and there is no certainty as to when regional, not least long-haul routes will fully reopen and return to satisfactory profitability. The timing and shape of the ramp up in the crucial 737 MAX programme also remains unclear and
Earnings near trough, but valuation running well ahead Senior’s FY 22E consensus EPS is only 30% of its pre-pandemic level, suggesting upgrade potential as end markets recover. Meanwhile, management are working hard to cut costs, and Flexonics should benefit from US Heavy Truck markets. But we do not believe Aerospace revenues (73% of sales) will start to recover until FY 22E, and we see the shares running well ahead of the recovery in group earnings. The share price has more than doubled since November, reaching 65% of its pre CV-19 level, with the valuation reaching FY 22E/23E EV/EBIT of 19.2x/12.2x, 24.7x/14.1x PER (above historic averages: pre pandemic two-year forward EV/EBIT 8.2-13.5x). With 12% downside to our new target price of 92p, we cut to Reduce. Jolyon.Wellington@peelhunt.com, Henry.Carver@peelhunt.com, Harry.Philips@peelhunt.com, Afonso.Osorio@peelhunt.com 13-page note
1H trading The 1H20 outturn has been impacted by a high level of operational gearing on reduced volumes, as expected (Revenue £409m, -30%), with adjusted operating profit of £9m (1H19: £46m) representing an operating margin of 2.2% (1H19: 8%) in the first half. Goodwill impairment, primarily in the Aerostructures business, drove a reported loss of £(126)m (1H19: £39m profit). Return on Capital Employed as a result declined to 6.8% (1H19: 11.6%). Adjusted EPS reduced 91% to 0.72p. The interim dividend will not be paid, as expected. FCF has increased 21% to £16m, largely driven by inventory reduction, and net debt decreased by £29m to £239m, representing 1.6x ND/EBITDA, within the level of pre-relaxed covenants. A further relaxation has been secured for the June 2021 test, with an additional test instated for September 2021. Actions underway The Group has taken advantage of customer site closures to accelerate the planned transfer of some work packages to SE Asia. Group headcount has been reduced by 17%, with a further 9% reduction to come in H2. Total restructuring costs this year will be £35m, with £35m of cumulative savings this year and annualised run rate savings of £45m. Outlook Guidance remains withdrawn. We expect downgrades to consensus given lower build rates in Aerospace, and uncertain recovery in Flexonics end markets, through H2 and into 2021 and the level of profitability implied by these results, pre-restructuring benefits. Analyst presentation at 11am
Significant disruption COVID-19 is causing significant disruptions to end markets and supply chains, with customer demand falling as activity levels have reduced. The tangible impact from COVID-19 that was felt in March has continued into April. As a result, a significant number of employees, c.17% of the workforce, have been furloughed. Defence markets continue to be robust; for Senior, industrial power and energy aftermarket is also proving robust, partially offsetting the impact in civil aerospace, land vehicles and oil & gas markets. Restructuring commenced at the end of last year continues. Leverage and lenders At 31 December 2019, committed borrowing facilities were £305m with an average maturity of 4.4 years and the Group had headroom of £159m under these committed facilities. Net Debt was £230m (inc. £84m of leases). The Group has both UK and US bank lenders as well as US private placement investors: UK and US banks have agreed covenant “relaxations” in relation to the June and December 2020 tests, and the Group is currently in discussions with the four US private placement investors on covenant relaxations. Looking forward Guidance remains withdrawn. The strategic review of the Aerostructures business has been cancelled – the business will remain within the Group. Our view Companies that have been agreeing covenant waivers / relaxations with their banks have been enjoying share price relief. We upgraded to Hold in February on a more optimistic medium-term outlook for margins. With civil aero build rates being reduced, the volumes needed to attain that margin trajectory are now clearly at risk.
FY19: Results were marginally below/ahead of our estimates at the revenue/adj. EBIT level, resulting in margins 30bps ahead. Cash generation was a highlight, with disciplined working capital management (despite 737 MAX disruption around year-end). Net debt was better, at £229m, with net debt/EBITDA on a covenant (frozen GAAP) basis of 1.1x being flat on FY18. Turning more positive: We downgraded to Sell in November 2019 on potential 737 MAX disruption, widebody rate cut risk and longer-term threat from increased electrification. We remain cautious on the latter (contentiously more so in Aerospace), but believe the near-term outlook reflects the known headwinds. We now turn more positive on medium-term margin recovery, which we see being driven by a return to volume growth across the group, continued focus on cost savings and the positive mix effects that should result from not rebidding on certain structures contracts, efforts to win more fluid systems content as well as good momentum in Defence, where programmes are still in ramp-up and there is also an aftermarket opportunity. Management reiterated its medium-term ROCE target of 13.5% (post-IFRS 16). ROCE was 11.1% in FY19, -50bps y-o-y. COVID-19: Management expects no material impact on trading; one of two operations in China has reopened and one is expected to reopen in a matter of weeks. Clearly, any further global contagion could present supply chain risk, with the footprint across SE Asia including the Aerospace facility in Malaysia. Estimate changes: We increase FY21E adj. EBIT/(FD) EPS by 3%/5%. Valuation: Our target price increases to 150p (from 125p), reflecting our underlying upgrade to FY21E profit and cash, as well as potential Aerospace mix improvement. We show our expanded SoTP on page 3.
FY19 Results: adj. EPS 16.2p slightly ahead (cons. 15.5p) Revenue of £1,111m, in line with INVe / cons; representing CER growth -1%. Adj. EBIT of £89.4m, in line with INVe (£88.1m) / cons. (£88.2m); adj. EBIT margin of 8.0% (INVe 7.8%). Aerospace: adj. operating margin 9.1% (vs INVe 8.9%). Flexonics: adj. operating margin 9.5% (vs INVe 9.3%). Central costs: came in 13% lower than FY18, driven by lower share-based payments and discretionary cost control. Adj. EPS of 16.17p, 4% ahead of consensus (15.3p) / 3% ahead of INVe (15.8p). Final dividend of 7.5p/share, (vs INVe 7.4p / Cons. 7.7p) an increase of 1% vs FY18. Net debt (Post IFRS 16) £229.6m; Net debt / EBITDA on covenant (frozen GAAP) basis 1.1x (vs FY18 1.1x). ROCE (post IFRS 16): 11.1% vs 11.6% (FY18A). Outlook: No changes expected to consensus estimates Outlook statement flags monitoring development of COVID-19 (Flexonics facilities in China, Aerospace in SE Asia). 737 MAX production restart and lower ramp is already reflected in forecasts, following market update on 31 January. Our view: Headwinds remain We downgraded to Sell last year on potential 737 MAX disruption, widebody rate cut risk, and the long-term threat from increased electrification; today’s results reflect continued cost actions and discipline in the face of these difficult markets. While profits are not as exposed to air traffic / aftermarket as directly as peers, we would heed caution on COVID-19 given the Group manufacturing footprint in China and SE Asia, including an Aerospace facility in Malaysia supplying OEMs in US/Europe.
We reduce FY20E / 21E adj. EPS by 30% / 18%, reflecting FY20E Aerospace revenue (-)c.20% vs FY19E (incl. FX) and an Aerospace adj. EBIT margin of 7.5%-8%. Our FY19E revenue estimate is unchanged, while we increase adj. EPS by 6% on one-off lower central costs and a lower tax rate. Return of the MAX? 4Q19 reporting from US suppliers has given a clearer picture around the likely trajectory once MAX production restarts, which we assume to be 2Q20. We assume no deliveries for 1Q20, and that production returns to a rate of 42/month, from where it was halted, by 4Q21, with the previously planned rate of 57/month attained in 2022 – albeit risk factors remain, including global regulatory approval and the rate at which the parked backlog can be delivered to airlines, with a one-in-one-out approach likely. Further 787 rate cut: Boeing cut 787 production last year from a rate of 14/month to 12/month on a lack of Chinese orders. This will now be cut further to 10/month from 2021. Senior is closing a satellite site aligned to 787 (as other sites were able to re-deploy resources) so the impact might be mitigated. Widebody woes: For 2019, Boeing ended the year with negative net orders overall and Airbus was also in negative net orders for widebody programmes. Boeing’s 777x new widebody received no new orders in 2019, but the delayed first flight has now taken place, albeit with increased regulatory scrutiny now likely given its designation as a derivative rather than a new aircraft, which was also the approach taken with 737 MAX. Expanded SoTP: We break out Aerostructures and Fluid Systems in our SoTP to reflect margin differences. We reduce our target price to 125p (from 150p).
Aerospace division is hard to love: Pricing pressure continues and Senior has not re-bid on contracts with poor return profiles – commendable if not for the impact on capital efficiency. 737 MAX should return to service in 2020, but risk remains. Widebody rate cuts, delays and customer’s share loss are more concerning. Tier 1 suppliers are seeking greater exposure to Airbus versus Boeing. Compared to others, Senior’s product and customer exposure is unfavourable, and there appears diminishing self-help potential from here. IP obsolescence risk: Given exposure to internal combustion engines in the age of electrification, there is obsolescence risk at Flexonics. A cyclical recovery in 2021 is not yet certain, while R&D needs to increase in order to mitigate future share loss. Aerospace IP in fluid conveyance is not immune here either. Arranging deck chairs: Management continues to ‘Prune to grow’, with disposals to date being small and non-core. A focus on maintaining margins over pursuing growth may be sensible (GKN was taken out after pursuing the opposite strategy), but without a line drawn on disposals/closures the risk of hollowing out the Group rises; meanwhile, pricing pressure continues and Flexonics is already lean following restructuring in previous downturns. Dividend at risk: We reduce our FY19/20E DPS by 5%/27% to maintain 2.0x earnings cover. At this level (flat Y/Y), the dividend is not cash covered this year on our estimates – there is risk of a cut versus the 7.4p paid in 2018. Shutting the stable door? The shares have fallen c.45% since July 2018, but our updated SoTP generates meaningful downside and we see near- and medium-term headwinds posing further risk to earnings. Meanwhile, there are structural challenges longer-term. We cannot rule out the possibility of a bid but, balancing the risk/reward, we downgrade to Sell (from Hold).
Trading update: Senior expect FY19 outturn to be “broadly” in line with their expectations, albeit aided by lower tax and lower central costs. Aerospace: Revenue has been lower in the last 4 months, due to a further impact from 737 MAX, and also weakness in wide-body engine demand. H2 margins are expected to maintain the H1 level despite lower revenues. Further, some customer are delaying production ramp of certain contracts, with full rate production now expected in 2021 instead of 2020 on these contracts. Flexonics: Trading has been broadly in line with expectations, with truck, off highway and passenger vehicle markets in North America, Europe and Asia softening in last 4 months; end markets are now expected to continue to decline through 2019 and into 2020, with recovery expected in 2021. Key highlights: Restructuring announced: £15m in cash costs, with £6m to be incurred in 2019, with the balance in 2020. “Prune to grow” strategy continues, with two more non-core businesses disposed of in the period. Pension contributions have reduced from £8.1m p.a. to £5.5m p.a. as a result of the latest triennial valuation. Our view: We place estimates, target price and rating under review.
Be Heard (BHRD LN) Building on a successful launch | Carr’s Group (CARR LN) Healthy pickup in business momentum | Frontier Smart Technologies Group (FST LN) Further contract win with HARMAN | Senior (SNR LN) Trading in line; PBT to be slightly ahead
SNR FVA BHRD FST
The strategic intent is clear: Let's devote ever more resources to getting even more tied to the fortunes of Airbus and Boeing. Except there is only winner in this game and it’s not Senior shareholders. One would have thought that the profit warning of Q3/16 would have encouraged a change in tack. The Flexonics division could certainly do with some investment as it is looking hopelessly behind the technology curve. We do not believe that there is no aerospace cycle. Indeed, the likelihood of a sharp decline in wide-body deliveries is high given the over-capacity and the on-going gulf crisis.
As we have said previously, after a series of disappointments, it is to be hoped that FY17 will be the bottom for the recent cycle of earnings, as Flexonics markets recover and Aerospace volumes transition towards the new commercial programmes. These results again support that view and with a generally improving outlook in the previously challenging markets, we increase our target price to 248p and remain at Hold.
The shares have climbed recently on the back of optimism over the Aerospace & Defence sector. However, we continue to believe the risk to Aerospace forecasts remain on the downside as the renewed Gulf Crisis is likely to accelerate the pressure on Middle East airlines to review their capex. Profits at Emirates, Etihad and Qatar Airways were already under pressure due to excess wide-body capacity and US travel restrictions. However, the decision by the Saudi-led alliance to suspend all air travel to Qatar is only going to add to this pressure. We expect limited state support given the pressure on budgets due to low oil prices.
Rising tides have lifted Senior’s share price after recent profit warnings. In our view, this will not last as its strategic weaknesses will take a long time to resolve. In the Aerospace division, which accounts for 72% of group sales, ever greater shareholder resources are being committed to “growth” projects where the bargaining power is shifting to Airbus and Boeing. The pressure on margins will only intensify as the airline industry struggles to take deliveries of new aircrafts and focuses on sweating existing assets. In the industrial markets, the euphoria over Trump and Oil & Gas capex is already dissipating.
Cummins yesterday forecast that output of heavy-duty trucks in North America is projected to be 178,000 units in 2017, an 11% decrease yoy, with its market share to be between 29% and 32%. This is greater than the 9% decline we hadpreviously forecast. In 2016, output fell by 31% yoy with Cummins’ market share falling from 33% to 31%. As a result, we are cutting 2017 PBT and EPS forecast by 6% to £68.4m and 12.8p, respectively. With the share price now 25% above our target price, we are moving the stock back to SELL.
The company is paying the price of being bedazzled by the hubris of Aerospace OEMs, which are still punch drunk on easy money and government subsidies. If traffic growth was the answer, then the airline industry would not be consistently destroying value. Even if the management have recognised this, having committed vast resources to the Aerospace division it has little choice but to accept that days of double-digit margins are gone. Those debts have to be serviced. However, after yesterday’s downgrade and share price fall, at 12.5x 2016 EPS, Senior is arguably the cheapest stock in the Aerospace & Defence sector. We move our recommendation from SELL to HOLD.
Following yesterday’s sharp rise, the share price is now 23% above our target price, and therefore we are moving our recommendation to SELL from HOLD. While we acknowledge that exchange rate movements will benefit H2/16 profits over H1/16, the financial markets are discounting nothing for the growing and supressed risks to Aerospace growth. Indeed, the investment case now rests primarily on the Large Commercial Aircraft business, whose share of group sales rose by 5% to 45% in H1/16 and is consuming all the growth capex. However, as the experience with oil & gas, North American heavy truck and business jets has shown, the music can suddenly stop and when it does Senior’s strategy has struggled to stop profit leakage.
While recent downgrades have focused primarily on weakness in the Flexonics division, we believe the next round of downgrades will focus on the Aerospace division, which accounts for two-thirds of group revenues. In the last trading update in June, the management remained confident that its Aerospace division was on track to grow by around 45% over the 2015-2018 period thanks to rising volumes and rising content. We now believe that the airline industry is re-assessing its growth plans and expect further deferrals/cancellations. Our new estimates show that the Aerospace division will grow by just 29% over the 2015-2018 period. We have cut our target price by 20% to 186p.
As we said in March, the impact of US heavy truck, off-highway and Industrial markets have been overshadowing the growing potential of the Aerospace business, now accounting for c.75% of operating profit. Today’s update confirms that the Flexonics end markets remain tough but that Aerospace is progressing as hoped. With increasing content on the major new commercial aircraft programmes, Senior is well placed to benefit over the next 5 to 10 years. A recovery in Flexonics markets would be a bonus. We continue to see strong attraction at this level (P/E of c.12.7x) and remain at Buy
SENIOR PLC (SNR LN) Expectations unchanged | VERONA PHARMA PLC (VRP LN) Significant potential upside
Senior plc Verona Pharma plc Sponsored ADR
A visit to one of Senior’s key aerospace facilities has confirmed the high quality nature of the Group’s offering in this area and highlighted the strong growth opportunities in commercial aerospace. The shorter term impact of US heavy truck, off-highway and Industrial markets has overshadowed the growing potential of the Aerospace business, which now accounts for c.75% of operating profit. With increasing content on the major new commercial aircraft programmes, Senior is well placed to benefit over the next 5 to 10 years and we remain confident in Senior’s position as a Best Idea for 2016. Buy.
We are downgrading our revenue forecast by 2% for 2016 and 2017 reflecting a 13% and 6% cut in the Flexonics’ division, where lower truck output and oil & gas capex cuts are going to be deeper than we had expected. As a result, we have also cut our operating profit estimates by 10% for both 2016 and 2017. We have also cut our operating margin for Aerospace by 100bps reflecting the pricing pressures. The net impact is to reduce our EPS for 2016 and 2017 by 12% to 17.4p and 19.5p, respectively. At 12x 2016 EPS, the stock is trading within the UK Aerospace & Defence sector multiple range of 10-16x if one ignores Rolls-Royce’s rating of 26x. A sector average of 13.2x equates to a Target Price of 230p.
The impact of US heavy truck, off-highway and Industrial markets are overshadowing the growing potential of the Aerospace business, which now accounts for c.75% of operating profit. With increasing content on the major new commercial aircraft programmes, Senior is well placed to benefit over the next 5 to 10 years. We reduce our target price to 264p (c.15x FY16 EPS) from 279p, but see strong attraction at this price and remain at Buy.
We expected difficult conditions in Flexonics, but anticipated downgrades are a bit worse than we would have hoped, c.10% in FY16 to PBT of c.£95m, with strong decline expected in heavy truck, off-highway and Industrial. This would equate to EPS of c.17.5p, and a P/E of c.12.6x, which we feel remains too cheap given the Group’s aerospace potential. The new Chief Executive is also implementing a number of initiatives to drive the Group forward which we will hear more about at the analyst presentation. We expect to remain at Buy.
Senior’s share price has been depressed in the latter part of 2015, affected by ongoing oil & gas sector woes as well as loose read across from the VW scandal and aerospace aftermarket weakness. We feel that the Group offers much stronger visibility than most of its peers thanks to its large rump of commercial aerospace business and that, overall, the outlook should remain positive into 2016. We also continue to feel that Senior could be an M&A target in an active sector, or could continue to be an accretive acquirer. Given the subdued outlook for more general industrial companies, we feel that Senior should outperform in 2016.
Senior has been a very positive story over the last decade, although market performance this year has been weak. However, as a further step in augmenting growth, the purchase of Steico Industries appears to be a positive for the new CEO. Despite difficult trading conditions in some markets, Senior is bearing up relatively well and should benefit from rising aerospace volumes in the coming years.
Senior was one of our Q4 conviction buys in September, but has since been hit by defence related profit warnings (Roll-Royce, Meggitt, Chemring etc) and worries over general industrial/oil & gas related activity. Today’s announcement acknowledges that those areas are softer, as well as a temporary margin impact in aerospace, but the impact on forecasts is small (3%). The Steico acquisition looks like a sensible addition in terms of complementary skills and manufacturing capacity. Overall, SNR’s outlook is more predictable than most of the sector and we feel that the price has fallen too far. We await the call at 8.30am but expect to retain our 279p target price and Buy recommendation.
Customers including Cummins, Emerson and Amec Foster Wheeler are preparing for a protracted downturn at least into H1/2016 and we are further downgrading our forecasts for Flexonics for 2015 and 2016. Cummins, which accounted for 18% of Flexonics sales in H1/15, saw Q3 shipments of medium and heavy truck engines fall by 9-11% YOY; rising cancellations do not augur well for the near future. Emerson, which accounted for 6% of sales, is expecting further decline in Process Management of around 10% in the next six months. Today, Amec Foster Wheeler cut their dividend by 50% to reflect the deterioration in capex and pricing pressure.
We believe Senior will struggle to improve profitability in the second half of the year due to worsening demand in the Flexonics division, particularly in truck & Off-highway and commodity/energy markets. Truck & Off-highway account for 11% of group sales while Industrial markets are 15%. We now expect North American Truck & Off-Highway sales to have fallen by 35% in H2/15 compared with 26% in H1/15. With the benefit of hindsight, the acquisition of Lymington, which derives over 80% of sales from oil & gas markets, in April now seems too early. We cut our recommendation from BUY to HOLD and cut our target price to 293p (402p).
Senior’s share price seems to be factoring in much more forecast risk than we perceive. We have slightly reduced forecasts today to reflect some headwinds, but feel that the Group offers much stronger visibility than most of its peers thanks to its large rump of commercial aerospace business. Overall, the outlook should remain positive into 2016 and we continue to feel that Senior could be an M&A target (or acquirer) in an active sector, e.g. Berkshire Hathaway’s recent acquisition of Precision Castparts. We reduce our price target to 279p (c.14x FY16 EPS) from 287p but move to BUY from Hold as we foresee relative outperformance in Q4 and into FY16.
A mixed H1 with ongoing margin pressure in the Aerospace division and oil related challenges in Flexonics. Strong growth opportunities remain with existing commercial aerospace programme rates increasing as well as new programmes commencing. We feel that Senior is a high quality business which is currently facing more headwinds than usual, including currency which will affect performance in H2. We await the views of the new Chief Exec but expect to remain at Hold for now.
