Looking beyond the current turbulences
■ We initiate on Zodiac Aerospace with an Outperform rating and a
EUR29 target price. We believe the current challenges offer a good entry
point into a growth story focused on an attractive end market (cabin interiors).
■ Stock down 19% YTD following production issues: Troubles started to
emerge in the seats business in 2014, with delays in deliveries and failed
certifications, culminating in a FY14/15 sales announcement that included a
profit warning of a 40% drop in operating income. We believe the root cause
was a loss of operational control after a period of strong growth (revenues
rose 2.3x from 2009/10 levels).
■ The business model does not appear to be broken: The difficulties in the
seats business have negative financial and commercial consequences that
cannot be underestimated. But we believe that Zodiac will emerge stronger
from what we view as a growth crisis. Management is implementing remedial
structural changes across the group, which we think should lead to a full
industrial and financial recovery by end-FY2016/17.
■ Catalysts: FY14/15 results on 24 November, Q1 sales on 15 December.
■ Valuation: Zodiac's operating profit of EUR500-600m, excluding the seats'
troubles, should rise to c.EUR1bn by 2020E, which we believe is not priced
in. The market appears to be pricing in the company's current challenges, a
perceived lack of visibility and a loss of credibility after three consecutive
profit warnings. We arrive at a target price of EUR29, based on a 2017E/18E
SOTP valuation and earnings returning to normalised levels. At our TP,
Zodiac would trade on an adjusted EV/EBIT multiple of 9.9x 2017/18, at a
15% discount to its historical average of 11.8x. On Credit Suisse HOLT®,
the warranted price is EUR33 and the stock reads as Contrarian.