Airbus — Transition management continues

Airbus — Transition management continues

While Airbus has continued to maintain guidance for FY17, the demands to deliver in Q4 are clear. Although A320neo engine issues keep the pressure on the production schedule, the company is making good progress on its other programmes. A resumption of EPS growth in FY18 remains the main support for the investment case.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Airbus

Transition management continues

Aerospace & defence

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2 November 2017

Price

€87.4

Market cap

€68bn

Share price graph

Share details

Code

AIR

Listing

Euronext

Shares in issue

774.5m

Business description

Airbus is the European manufacturer of large civil passenger jets, which competes directly with Boeing of the US. The group also produces and supports helicopters, space equipment, military aircraft and other defence equipment.

Bull

Huge civil aircraft backlog representing over 10 years (at 2016 delivery levels).

Production rates should now start to rise from the recent plateau as neo transitions develop and A350 ramp-up kicks in.

Cash conversion should improve as the new product investment phase in Civil wanes.

Bear

Continuing issues in military aircraft with A400M facing challenges to achieve contractual capabilities.

A320 neo engine delivery delays continue to affect production.

Ongoing SFO and PNF investigations hold the potential for imposition of monetary penalties.

Analysts

Andy Chambers

+44 (0)20 3681 2525

Annabel Hewson

+44 (0)20 3077 5700

Airbus is a client of Edison Investment Research Limited

While Airbus has continued to maintain guidance for FY17, the demands to deliver in Q4 are clear. Although A320neo engine issues keep the pressure on the production schedule, the company is making good progress on its other programmes. A resumption of EPS growth in FY18 remains the main support for the investment case.

Programme issues persist

Continuing the trend from H1, Q3 results demonstrated a stable top line and a step down in adjusted EBIT. Reported adjusted EBIT of €1,796m represented a 25% decline on the first nine months of 2016. While the Q317 figure of €697m was just 4% down on Q316 (€729m), it did demonstrate an improvement in both the Commercial Aircraft and Helicopters divisions. Investment in innovation at company HQ does explain some of the decline. The engine issues continued to constrain A320neo production. While 90 aircraft were delivered to 19 customers in Q3, new engine availability and allocation between the OEM and spare pools will reduce the FY delivery total to slightly below the 200 targeted. Although full year free cash flow is expected to be similar to 2016 before M&A and customer financing, there has clearly been an impact on cash performance from inventory build for the production ramp-up and engine delays on neo with a negative working capital move of €4.5bn ytd. In addition to the ongoing UK Serious Fraud Office (SFO) and France’s Parquet National Financier (PNF) investigations, the company has discovered and declared certain inaccuracies with filings with the US Department of State relating to part 130 of ITAR. Importantly, FY guidance for the group has been maintained.

All to deliver in Q4

December is always Airbus’s busiest month for deliveries. Since 2008 it has shipped between 10-16% of its total annual deliveries in December. As described, the A320neo delivery profile is very much loaded into Q4. Moving into 2018, the A320 neo should account for more than half of single-aisle deliveries for the group. In addition, the A350 ramp-up is making good progress towards break-even by the end of the decade and the A330neo maiden flight was a successful milestone.

Valuation: Momentum to build

At the H117 report we noted that FY17 would be heavily skewed to the second half to deliver FY guidance, and the Q4 delivery profile is now very much in focus. We continue to believe that cash performance should improve and earnings growth should accelerate in FY18 as the current programme issues are overcome.

Consensus estimates

Year
end

Revenue
(€bn)

EBIT*
(€bn)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

64.5

4.11

3.39

1.30

25.8

1.5

12/16

66.6

3.96

3.31

1.35

26.4

1.6

12/17e

67.0

4.00

3.26

1.44

26.8

1.7

12/18e

72.3

5.16

4.33

1.73

20.2

2.0

Source: Bloomberg consensus. Note: *Historic figures are EBIT adjusted as per Airbus’s calculation.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Airbus and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2014]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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