Saab — Update 22 July 2016

Saab — Update 22 July 2016

Saab

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Saab

Flying high

Aerospace and defence

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22 July 2016

Price

SEK278

Market cap

SEK29.5bn

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Share details

Code

SAAB-B

Listing

NASDAQ OMX

Shares in issue

106.2m

Business description

Saab is a Sweden-based international provider of military defence and civil security equipment, systems and services. It is divided into six divisions: Aeronautics; Dynamics; Electronic Defence Systems; Security & Defence Solutions (SDS); Support & Services; and Industrial Products & Services.

Bull

Strong backlog supports growth targets and defence spending turning up globally.

Customer-facing structure leads to further overhead savings from shared services.

Broad range of products in key demand areas.

Bear

Defence spending budgets remain constrained in the western world, but may start to turn.

High level of R&D investment, early stage long-term contracts and new product introductions constrain margins.

Trading at an all-time high.

Analysts

Andy Chambers

+44 (0)20 3681 2525

Roger Johnston

+44 (0)20 3077 5722

Saab’s interim results demonstrated strong progression towards its full-year targets although earnings were slightly below market expectations. The company continues to invest heavily in its major platforms for future growth and while order intake levels in the first half were more back to normal, future backlog development is expected. The overall positive momentum for global defence and security spending should support this ambition. Backlog execution with improved mix and modest efficiency improvements should support the targets of 5% organic growth and a move towards a 10% margin in the coming years.

H1 results show good progress

Organic sales growth of 23% and a 66% rise in operating profit, with margins expanding 120bp to 4.4% in H116, suggest Saab is well on course to achieve FY16 guidance. Management reiterated expectations for at least 5% organic sales growth with a similar operating margin to the 7% achieved in FY15. This was despite an increase in expensed R&D relating to the T-X development programme with Boeing. The backlog decline was modest in the first half, with order intake improved by around 10% excluding Kockums’ SEK8.6bn A26 submarine order booked in H115. The cash performance was also strong, aided by strong customer milestone receipts and advances with net debt falling to SEK405m at the half year.

Positioning for defence upturn

Management continues to focus on investment in new opportunities and platforms. Five programmes are key to Saab’s growth: the T-X trainer aircraft programmes for the US; the Gripen E fighter upgrade that was rolled out in May; the export sale to Brazil; the A26 submarines; and the GlobalEye AEW (Airborne Early Warning) aircraft that has now signed a second customer. While these are either in the early stage of supply contracts or in continuing development stages (T-X in particular) the drag on margins remains significant. However, as contracts mature on the existing backlog, margins should improve assuming solid execution. If global defence procurement budgets do indeed step up from next year, then Saab is well positioned to benefit and possibly extend its record backlog further.

Valuation: Rated for success

As Saab is now starting to deliver on its expectation of a resumption of growth, the shares have been performing well, rising to an all-time high ahead of the results. If it continues to drive earnings and cash returns ahead of its peers through successful execution of the plan then the premium rating should be sustained.

Consensus estimates

Year
end

Revenue
(SEKm)

PBT
(SEKm)

EPS
(SEK)

DPS
(SEK)

P/E
(x)

Yield
(%)

12/14

23,527

1,523

10.8

4.8

25.7

1.7

12/15

27,186

1,731

12.8

5.0

21.7

1.8

12/16e

29,009

1,904

13.4

5.9

20.7

2.1

12/17e

30,782

2,332

16.4

6.5

16.9

2.3

Source: Thomson Reuters Eikon consensus estimates

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United Kingdom

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US

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New Zealand

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Thales — Update 22 July 2016

Thales

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