European Civil Aerospace
Moving more price targets to Dec-16 basis; upgrade
Zodiac to Neutral from Underweight
We recently moved our price targets on Airbus, Meggitt and Senior to a Dec-
16 basis from Dec-15 basis. We now do the same for Safran (OW), MTU
(UW), and Zodiac (which we upgrade to Neutral from Underweight).
* Zodiac (upgrade to Neutral; raise PT to €27 from €23): ZOD reports its
FY15 results on November 24, having pre-announced a profit warning on
September 15. Ahead of the FY15 release we leave our estimates
unchanged. However, rolling our multiples-based price target forward to
Dec-16 from Dec-15 increases our price target by 17% to €27. We believe
that there is still a wide range of outcomes for ZOD’s earnings YE Aug 16-
18E, as the key unknown is the rate of improved execution after five profit
warnings since September 2014. We thus believe that the appropriate rating
is Neutral.
* Safran (remain Overweight; raise PT to €82.5 from €75.5): We now
value Safran on a Dec-16 basis, from Dec-15 previously, increasing our
multiples-based PT by 9%. We are not changing our EPS estimates with this
note. In our results note of October 22 we outlined two major investment
positives for Safran (best-in-class aftermarket growth; a very big FX
tailwind from 2018) and two emerging concerns (execution problems on two
new engines; the potential for a full EU investigation into the civil aero
aftermarket.
* MTU Aero Engines (remain Underweight; raise PT to €85.5 from
€78.5): We now value MTU on a Dec-16 basis, from Dec-15 previously,
increasing our multiples-based PT by 9%. We increase our MTU defined
EPS for 2015-18E by 2% pa, following the Q3 15 results last week. MTU is
going through a major transition period whereby a lot of its older engines are
being retired from service, and are being replaced by new engines which are
sold at a loss in the expectation of future high margin spares sales. This
transition is challenging but will leave MTU well positioned for the future; it
is not the reason for our UW rating. Our main concerns (flagged in several
previous notes) are MTU’s accounting practices whereby it is boosting
2015-17E EPS by c20-30% pa from capitalising R&D and the interest
payments on new investments, and significantly boosting reported FCF by
omitting entry fees paid to join new programmes and also omitting vendor
financing commitments on those programmes. As a result of these issues,
MTU is the most expensive civil aero stock in our coverage on a 2016E
clean EV/EBITA of 16.1x, a 24% premium to the European Civil Aero
average.