Safran — Update 16 March 2016

Safran — Update 16 March 2016

Safran

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Safran

Securing the future

Aerospace & defence

QuickView

17 March 2016

Price

€59.2

Market cap

€25bn

Share price graph

Share details

Code

SAF

Listing

Euronext

Shares in issue

416.4m

Business description

Safran is an international high-technology group and tier 1 supplier of systems and equipment in its core markets of Aerospace, Defence and Security. Its main activities are aeroengines, aircraft equipment such as landing gear, wheels and brakes, avionics, nacelles and wiring, and security and ID products.

Bull

CFM International JV with GE of the US has 75% market share for narrowbody aircraft engines

Strong original equipment supply to airframers, notably Airbus and Boeing

Potential for strong cash generation growth supports M&A and shareholder distribution growth

Bear

Execution risk and uncertainty arising from review of Security operations

Risk from new programme developments such as Silvercrest

Perception of substandard profitability in Defence and Aircraft Equipment activities

Analysts

Andy Chambers

+44 (0)20 3681 2525

Roger Johnston

+44 (0)20 3077 5722

Safran’s ambition in the security market appears to have waned, with the company confirming a review of the division’s operations. While long-term guidance to 2020 appears conservative, it still implies recurring profit growth in excess of 5% pa with expanding margins and growing cash flow. The recent share price retrenchment fails to recognise this adequately.

Security operations future under review

With the detection operations up for disposal, centred on the former GE Homeland Security business, the rest of the Security division involved in ID and security is now undergoing a formal strategic review. This will determine the most appropriate route to optimise shareholder value and could result in a complete withdrawal from the segment. The process should be complete by the year end.

Increased focus on core aerospace and defence

The new management team appears set to follow the Airbus Group example and focus its capital resources on developing the core Aerospace and Defence capabilities of the group. Propulsion, while transitioning to new engine technologies, appears set for a period of strong growth driven by its large installed base and associated aftermarket. Management also expect to raise margins in Aircraft Equipment, Defence and Security by 1% point per year.

Medium term targets set

Management has set three key five-year targets. In 2020 Revenues should exceed €21bn (after allowing for the formation of Airbus Safran Launchers JV), group margins should exceed 15% and cash-flow conversion should be far higher than in 2015, with an expected average 50% conversion ratio for the period. These imply EPS growing at a minimum CAGR of 7% over the five years. Anecdotally this is lower than previously discussed targets. However, management has indicated it feels the new guidance levels are prudent and achievable, and probably beatable.

Valuation: Room for improvement

Unlike some of its peers, Safran expects to make solid progress. While the execution risk introduced as a result of the review of the Security division may create some value uncertainty, the strength of the core, even during the transition phase in Propulsion to LEAP engines from CFM 56 over the next three years, should drive significant long-term recurring cash-flow growth, warranting a rerating.

Consensus estimates

Year
end

Revenue
(€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

15,355

1,942

3.19

1.20

18.6

2.0

12/15

17,414

2,212

3.88

1.38

15.3

2.3

12/16e

17,997

2,334

3.84

1.50

15.4

2.5

12/17e

18,844

2,423

4.04

1.60

14.7

2.7

Source: Company reports, Bloomberg estimates. Note:*Excludes one-off items.

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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

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

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