A pause in 2017 to clear away key uncertainties
■ Downgrade to Neutral: Following the recent rally in the name, which we believe has largely been fueled by the USD strengthening and the overall reassurance on the LEAP delivery rates, we downgrade the stock to Neutral (vs Outperform).
■ Several uncertainties that need to be cleared away: We (and the market) assume a rather benign scenario for LEAP costs, but Safran enters 2017 in a phase of major industrial risk around the ramp-up of that engine. This combines with a strategic question around the use of the cash proceeds from the disposal of its Security businesses and M&A ambitions (we maintain the view that Safran could be interested in Zodiac, if the latter were to be up for sale). Also, investors may want a quantified IFRS 15 framework to allay potential concerns on how this will impact profits. Finally, the absence of consistent consensus data (as a consequence of the upcoming disposal of Security, to be held as discontinued asset held for sale for most of 2017) further blurs the market view on future earnings.
■ Earnings revisions: We increase our 2016E operating profits by 1% and trim 2017E and 2018E by 3%. We now expect a small growth in operating income in 2016E and a small decrease in 2017E, before growth rebounds strongly from 2018E onwards (60% USD-driven).
■ Catalysts and Risks: FY results on February 24. LEAP issues, a slowdown in air traffic and IFRS 15 can be downside risks; on the upside: USD strength, aftermarket acceleration, further share buyback announcements.
■ Valuation: We believe that any further re-rating of the stock requires that the market is satisfied with 1/ the financial consequences of the LEAP ramp-up and 2/ the cash allocation decisions. Our target price of EUR68 (unchanged) is a combination of 2017E and 2018E SOTPs, capturing both short term pressure and longer term growth in earnings