AIR has good long-term prospects but in 2016 it is struggling with shorterterm
execution problems. News flow over the weekend suggests that some of
these problems are continuing and we worry they will spill into 2017. Our
EPS estimates have long assumed that AIR undertakes a €2bn share buyback
in 2017 (given the significant disposal proceeds received in 2016) but we now
think it is prudent to remove that assumption from our forecasts. We thus
reduce our 2016-19E EPS by -1%/-1%/-4%/-4%. Whilst we expect AIR's EPS
to grow nicely in 2018E, our 2018E EPS is 17% below the BBG median
consensus. If we are right the shares will be caught in a tug-of-war between
“an EPS growth story” and a “downward EPS revisions story”. Until
consensus is reset and news flow (on execution; from airlines) improves, we
remain Underweight with an unchanged Dec-16 PT of €47.
New delays on A320neo engine: On Friday 16 September, at 4pm UK
time, the head of UTX (parent of P&W) said P&W would only deliver c150
GTFs in 2016, down from a plan of c200. The GTF is one of two engines on
the A320neo (new engine option). AIR says it can still deliver >650 planes
in 2016, delivering more A320ceo (current engine option). However, we
have two concerns. (1) If AIR is left with c20 undelivered A320neos at year
end this could add c€1bn to its inventory. (2) The new delays add a lot of
risk to the A320neo delivery schedule in 2017 in our view.
A new restructuring plan at Airbus: According to the FT (Sunday 18
September) Airbus is about to launch a “new” restructuring plan. CEO
Enders alluded to this in the H1 2016 results so it is unclear whether the
“new” plan is simply “blocking and tackling” or something more substantial
that will require upfront charges. We think AIR bulls will emphasise the
potential payback on any restructuring. However we have several concerns.
(1) Why is a restructuring plan needed when Airbus is so confident on its
earnings outlook? (2) Will there be any cash cost of a restructuring plan? (3)
The FT also suggested more charges are expected on the A400M. We
already assume a further c€400m on top of the c€1bn booked in H1 2016,
but it is unclear what the market expects and/or if our estimate is prudent
enough.