Airbus — Resolving engine delays key for take-off

Airbus — Resolving engine delays key for take-off

Q118 trading continued to be adversely affected by engine delays on the A320neo programmes, which constrained deliveries as the manufacturing programme ramps up. Nevertheless, adjusted EBIT actually improved year-on-year. Assuming the corrective actions are successful, Airbus’s sequential progress in cash flow and profitability should become more consistent. Management appears confident that with current A320 and A350 ramp-ups being achieved by mid-2019 and the A400M cash profile improving from next year, strong EPS development and cash growth are in prospect. FY18 guidance is for a 63% rise in adjusted EBIT under IFRS 15 to €5.2bn, with sustainable growth increasingly likely in the future.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Airbus

Resolving engine delays key for take-off

Aerospace & defence

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30 April 2018

Price

€96.78

Market cap

€75bn

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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 2017 delivery levels).

Production rates are set to rise from the recent plateau as A320neo transitions to 60 per month by mid-FY19 and A350 moves to rate 10 per month.

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

Bear

Continuing issues in military aircraft, although A400M contractual resolution appears closer.

A320 neo engine delays continue to affect deliveries.

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

Analysts

Andy Chambers

+44 (0)20 368102525

Annabel Hewson

+44 (0)20 3077 5700

Airbus is a client of Edison Investment Research Limited

Q118 trading continued to be adversely affected by engine delays on the A320neo programmes, which constrained deliveries as the manufacturing programme ramps up. Nevertheless, adjusted EBIT actually improved year-on-year. Assuming the corrective actions are successful, Airbus’s sequential progress in cash flow and profitability should become more consistent. Management appears confident that with current A320 and A350 ramp-ups being achieved by mid-2019 and the A400M cash profile improving from next year, strong EPS development and cash growth are in prospect. FY18 guidance is for a 63% rise in adjusted EBIT under IFRS 15 to €5.2bn, with sustainable growth increasingly likely in the future.

Progress in Q1 despite delivery delays

Q1 results were reported after the adoption of IFRS 15. Q118 revenue of €10.1bn (Q117: €11.4bn restated) compared to consensus of €10.2bn. Airbus commercial aircraft revenues fell by almost €1bn to €7.2bn, reflecting lower aircraft deliveries (Q118: 121 vs Q117: 136) as engine delays held back completions on the A320neo family as well as adverse unhedged FX movements. However, the adjusted EBIT loss for the operation reduced to €41m from a loss of €103m in Q117. The decline in sales also reflected disposals by Airbus Helicopters (AH) and Airbus Defence and Space (ADS), which were otherwise relatively stable y-o-y, especially in terms of adjusted EBIT, which totalled €109m. For the group Q118 adjusted EBIT of €14m (Q117: -€19m restated) vs consensus of -€63m. The free cash outflow before M&A and customer financing was €3.8bn (Q117: outflow €1.3bn), reflecting the build-up of undelivered inventory as well as unfavourable timing on trade liabilities.

Moving to more consistent cash inflow growth

As the civil ramp-ups are achieved, Airbus should move down the learning curve and be able to deliver improving margins and more favourable cash flow dynamics. Guidance for 800 deliveries this year has been reiterated implying H218 catch-up. Feasibility studies on further rate increases to 70+ per month for the A320 are indicative of the potential for growth to be sustained into the mid-2020’s. Greater stability in AH and improved cash flow at ADS as the €1bn consumption in FY18 by the A400m transitions to a likely cash inflow in FY20 should also help.

Valuation: Moving to more sustained growth

FY18 is all about H2 catch-up but, assuming success, the improvement expected in EPS over the next few years should be supported by a more consistent cash flow growth now that the investment and ramp-up phases are completing in civil.

Consensus estimates

Year
end

Revenue
(€bn)

Adj EBIT
(€bn)

EPS
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/16

66.6

3.96

3.31

1.35

29.2

1.4

12/17

59.0

3.19

3.71

1.50

26.1

1.6

12/18e

66.8

5.16

4.44

1.79

21.8

1.9

12/19e

72.6

6.22

5.59

2.19

17.3

2.3

Source: Company reports, Bloomberg. Note: IFRS 15 adjusted from FY17 except FY17 EPS.

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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 pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 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 Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. 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 [2018]. "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

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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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