* Attention on outlook and risks to this outlook, not FY14/15 numbers
Zodiac is due to report FY14/15 results on 24 November at 7am CET. The
actual FY14/15 results numbers are likely to be a side show, with all attention
on: 1) the potential for recovery in the seating business following production
problems; and 2) the earnings growth potential for the group once these
execution problems are resolved. We maintain our nearer term caution on
Zodiac shares and our TP of E23.
* FY14/15 results likely held back by plethora of exceptional charges
Marked by execution problems at Seat and associated cost, FY14/15 reported
numbers will have little meaning. Overall we forecast EBITA of E310m, 6%
below management guidance of c. E330m (“40% YoY decline in EBIT”). We
include E400m of exceptional charges in our FY14/15 EBIT forecast on top of the
E40-50m booked in FY13/14. What is key, we believe, is the breakdown of costs
between operational costs (some of which could be ongoing) and higher
customer penalty charges and inventory impairments, which are clearly one-offs.
* Key points to look for: medium-term margin potential
The key focus of the results in our view will be on three points: 1) an update on
Seat: Zodiac had reported 1,700-pax delays in mid-September; 2) the provision
of FY15/16 guidance and specifically how much of the extra costs need to
remain in the business to ensure future on-time delivery; and 3) its adverse
commercial impact risk status following the AA announcement.
* Hold maintained – hard to get excited in nearer term
Although we see the benefit to Zodiac’s gearing against a weak Euro, we
continue to see better-value routes from Airbus (AIR.PA/AIR FP: Buy, TP: E77,
current: E66) and Dassault Aviation (AVMD.PA/AM FP: Buy, TP: E1,330,
current: E1,038). Our SoP and through-cycle earnings-derived target price of
E23 is unchanged. Downside risk: Euro strength vs. the USD. Upside risk: reemergence
of M&A conjecture (p.4).