* Source of opportunity
With this note we update our estimates for the LEAP learning curve and cost
assumptions communicated at the recent Capital Markets Day (CMD). We
arrive at meaningfully lower losses than implied in margin guidance (midto-
high teens in the Propulsion division). We estimate 19%/19%/20%
margins in 2016/17/18E in the Propulsion division, but this does not include
the deconsolidation of ASL; building this into our estimates would result in
margins of 21%/21%/23% in 2016/17/18E. We therefore expect margins to
beat guidance over the next three years, putting upside pressure on
consensus margin forecasts. We reiterate our CL-Buy.
* Catalyst
Safran will report 1Q revenues on the April 26; we believe positive
commentary around the progress of LEAP development could act as a
positive catalyst. 1H results in July should point to lower-than-expected
margin dilution.
* Valuation
Our EBIT estimates change by 0%/-3%/-6% in 2016/17/178E, reflecting a
higher-than-expected headwind from the decline in CFM56 OE revenue. Our
12-month price target decreases by 3% to €76 reflecting the revised
earnings estimates. Safran currently trades at 7.5x 2018E EV/EBIT (a 20%
discount to the sector) and 11x 2018E P/E despite offering a 2016-20E
EBIT/EPS CAGR of 11%/18% vs. the sector average of 11%/15%.
* Key risks
Key risks to our view and price target include: 1) a weakening US$, 2)
program delays or charges relating to LEAP, 3) slower-than-expected
margin improvement in Defence, Security and Equipment divisions.