Airbus — Q1 turbulence but FY17 ready on the runway

Airbus — Q1 turbulence but FY17 ready on the runway

Airbus’s Q117 margin was lower than expected, at 1.8% compared to market consensus of 2.5%, mainly due to weaker pricing of old aircraft and higher costs of production for new ones. The helicopter division also made an unexpected loss. However, management confirmed its FY17 guidance and is confident that the challenging production ramp-up is on track.

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Airbus

Q1 turbulence but FY17 ready on the runway

Aerospace & defence

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28 April 2017

Price

€75.00

Market cap

€58bn

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Share details

Code

AIR FP

Listing

Euronext

Shares in issue

772.9m

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 just under 10 years of production (at 2017 delivery levels).

Production rates are now rising as production ramps up on the A350 and the A320neo.

Cash conversion is starting to improve due to better working capital management and as the new product investment phase in civil wanes.

Bear

Continuing issues in military aircraft with A400M performance problems and lower Typhoon production.

Problems with the GTF engine (from Pratt & Whitney) are delaying A320 neo deliveries.

Airbus Helicopters is suffering from weak oil & gas demand, and the financial impact of the partly grounded H225 fleet.

Analysts

Alexandra West

+44 (0)20 3077 5700

Andy Chambers

+44 (0)20 3681 2525

Airbus is a client of Edison Investment Research Limited

Airbus’s Q117 margin was lower than expected, at 1.8% compared to market consensus of 2.5%, mainly due to weaker pricing of old aircraft and higher costs of production for new ones. The helicopter division also made an unexpected loss. However, management confirmed its FY17 guidance and is confident that the challenging production ramp-up is on track.

Negative price mix effect on EBIT is not a trend

Revenues were up 7% year-on-year to €13.0bn (3% ahead of consensus) driven by higher commercial aircraft and helicopter deliveries. Airbus Defence and Space (ADS) was stable; the lower headline revenue number (-17% y-o-y) was due to the sale of the defence electronics business and the formation of the launchers JV. Group EBIT adjusted was down 52% y-o-y. This was due to an adverse price and mix effect in civil aircraft, lower helicopter flying hours as a result of weak oil and gas markets, the financial impacts from the partial H225 fleet grounding following last year’s crash and the perimeter change at ADS. New order activity was low in the first quarter, but this is to be expected and the order book of over 6,700 commercial aircraft represents just under 10 years of production at 2017 rates. Free cash flow (before M&A and customer financing) was better than expected at -€1,269m reflecting the strong focus on working capital amid the production ramp-up and back-loaded deliveries.

Management confirms FY17, which may be cautious

Quarterly numbers at Airbus are often very lumpy and can unhelpfully cloud the long-term growth story. Management is confident of meeting its FY17 guidance and may well exceed it, as it is guiding for 700 aircraft deliveries but targeting 720. Harald Wilhelm made clear on this morning’s call that the Q117 margin is not indicative of the full year number and that he continues to expect mid-single digit growth in EBIT adjusted compared to 2016.

Risks from A320neo ramp-up

Airbus is currently managing its biggest ever production ramp-up with A320neo and A350 rates increasing simultaneously. This presents major logistical, operational and technological challenges. Management appears confident that the A350 is progressing along the all-important ‘learning curve’ and is on track to break even before the end of the decade. However, it is clear Pratt & Whitney (P&W) is struggling to deliver functioning GTF (geared turbofan) engines for the A320neo quickly enough to keep pace with the ramp-up. P&W says it is fixing the problems, but Airbus may have to pull forward delivery of lower-margin classics to substitute delayed neos.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

66.6

3.6

3.31

1.35

22.7

1.8

12/17e

68.4

3.7

3.42

1.48

21.9

2.0

12/18e

73.6

4.8

4.61

1.80

16.3

2.4

12/19e

83.6

6.2

5.82

2.28

12.9

3.0

Source: Bloomberg

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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 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 [2017]. "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

245 Park Avenue, 39th Floor

10167, 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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Real Estate

Target Healthcare REIT — Portfolio growth

Target Healthcare REIT (Target) continues to approach full investment, having completed the acquisitions of four care homes in the quarter to 31 March and one more in April. Portfolio value stood at £274.6m at the quarter-end (31 December: £253.1m). The Q217 dividend was the main cause of a slight decrease in EPRA NAV per share to 101.5p (31 December: 101.8p); we expect full dividend cover to be achieved in FY18 as the company becomes fully invested. The secular trends of an ageing population and a persistent lack of modern care homes create a significant opportunity for further investment to underpin the attractive dividend yield.

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