H1 charges to clear the way for H2 rebound
* H1 issues soon to be over: Programme issues on A320neo, A350 and A400M (largely supplier-driven) have troubled Airbus in H1. We expect the situation to improve from June-July onwards, which would make H2 a much better period for the stock. We do not expect these issues to reflect an underlying deterioration of the industrial performance of the group and to materially impact the 2018-2020 FCF story supporting our investment case.
* Programme issues largely priced in: We believe that the prospect of oneoff charges on A400M and A350 has been holding back the stock. We have now provided for EUR1.5bn of such exceptionals (of which EUR500m already in our model). These charges may be announced with H1 results, removing an overhang which has impacted H1 stock performance. They are not yet fully in consensus data but we estimate that they are largely priced in, after a 9% underperformance of the stock YTD against the STOXX600.
* Cycle worries appear overblown: A moderation of the order intake is normal in our view. This should not derail the expected delivery increase, given the backlog levels and good financial health of the airlines industry. Worries on short term order inflow may even be alleviated by the book-to-bill in April and May of respectively 1.6x and 1.5x
* Catalysts: H1 results on 27 July; Farnborough airshow on 11-15 July; restart of PW1000G-powered A320neos deliveries and ramp-up of A350 production in June; start of LEAP-powered A320neo this summer.
* Valuation: As a result of the additional one-offs on A350 and A400M, we trim our target price from EUR80 to EUR79 per share (with EUR/USD rates based on a spot of 1.10, unchanged). The stock currently trades on EV/EBIT multiples of 8.6x 2017E and 6.2x 2018E (vs an historical average of 10.0x). The expected 2018-2020 FCF accumulation should generate excess cash of up to EUR15bn, possibly distributed to shareholders via share buybacks