Saab — Prize fighter

Saab — Prize fighter

Saab shares continue to go from strength to strength. Q117 results confirm the company is on track to achieve above targeted organic sales development in the near term. Order intake remains positive and prospects for the new and upgraded versions of the Gripen fighter aircraft remain strong, aided by the improving trends in defence spending. The shares are trading once again at record levels, and the rating requires a continuing conversion of the pipeline into firm activity.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Saab

Prize fighter

Aerospace & Defence

QuickView

27 April 2017

Price

SEK426

Market cap

SEK45bn

Share price graph

Share details

Code

SAAB-B

Listing

NASDAQ OMX

Shares in issue

106.5m

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 budgets remain constrained, with high levels of competition.

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

Trading at an all-time high, with a rating that makes no allowance for mishaps.

Analysts

Andy Chambers

+44 (0)20 3681 2525

Alexandra West

+44 (0)20 3077 5700

Saab shares continue to go from strength to strength. Q117 results confirm the company is on track to achieve above targeted organic sales development in the near term. Order intake remains positive and prospects for the new and upgraded versions of the Gripen fighter aircraft remain strong, aided by the improving trends in defence spending. The shares are trading once again at record levels, and the rating requires a continuing conversion of the pipeline into firm activity.

Strong start to 2017

A positive book to bill ratio during Q117 drove the order book up to SEK109.4bn at the end of the quarter. The strong order intake during the period of SEK9.7bn was driven by two large orders; one for the second GlobalEye AEW (Airborne Early Warning) system, the other an anti-ship missile contract for the Dynamics activity. SEK20.1bn of the order backlog at Q117 is deliverable in the remainder of the year which gives a strong underpinning to FY17 sales estimates, with a further similar amount booked for delivery in FY18. Organic revenue growth of 8% was driven mainly by activity in the Gripen, A26 submarine and GlobalEye programmes. Despite continued high level of investment, notably in the T-X lead-in trainer aircraft programme for the US, operating margins rose to 6.6% from 4.3% in Q116. This was accompanied by an improvement in EBIT margin in all of the divisions except Kockums which experienced a slight decline. Cash flow was positive during the quarter with net debt falling to SEK0.87bn at Q117 (from SEK1.84bn at FY16).

Defence prospects increasingly positive

News that coincided with Q1 results came from Bulgaria, where the interim defence minister indicated that the country is to start negotiations to buy eight new Gripen aircraft. With many other campaigns also active, and when combined with improved prospect for defence spending globally, Saab remains well positioned to attain its medium-term 5% sales growth target, and should exceed this in the current year. Management guidance is for operating margins to improve compared to FY16, making progress towards its 10% goal.

Valuation: Premium rating achieved

The return to growth for Saab is now being confirmed, justifying the strong performance of the stock seen over the last few years. The delivery of the anticipated levels of profitability would still leave the rating extended, and we would not be surprised if Saab’s shares now faced a period of consolidation.

Consensus estimates

Year
end

Revenue
(SEKm)

PBT
(SEKm)

EPS
(SEK)

DPS
(SEK)

P/E
(x)

Yield
(%)

12/15

27,186

1,731

12.8

5.0

33.3

1.2

12/16

28,631

1,611

10.6

5.3

40.2

1.2

12/17e

30,908

2,233

15.9

6.2

26.7

1.5

12/18e

33,328

2,754

19.2

6.9

22.2

1.6

Source: Bloomberg

EDISON QUICKVIEWS ARE NORMALLY ONE OFF PUBLICATIONS WITH NO COMMITMENT TO WRITING ANY FOLLOW UP. QUICKVIEW NOTES USE CONSENSUS EARNINGS ESTIMATES.

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United Kingdom

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US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

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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 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

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

Middlefield Canadian Income — Exposure to high-yielding North American equities

Middlefield Canadian Income (MCT) is listed on the Main Market of the London Stock Exchange. It aims to invest in a diversified portfolio of Canadian and selected US companies that are able to pay high sustainable or growing dividends and have the potential to generate long-term capital growth. On a sector basis, the trust currently has high exposure to the pipelines, power & utility and real estate sectors. MCT is benchmarked against the S&P/TSX Composite High Dividend Index, which it has outperformed over one, three and five years. MCT currently pays a regular quarterly dividend of 1.25p, although the board has recently proposed a modest increase to 1.275p; its current dividend yield is 4.7%.

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