(Kepler-Cheuvreux) Safran : Solid execution of Morpho disposal

Solid execution of Morpho disposal
Safran announced yesterday it had entered into exclusive negotiations to
sell its security business to Advent (owner of Oberthur) for a total
valuation of EUR2.425bn. 

The deal is a positive in three ways.
Security business sold at solid valuation levels
The EUR2.425bn deal valuation is a positive surprise, for an entity having
generated EUR1.6bn of sales in 2015 and an EBIT margin estimated in the
range of 7%. This leads to EV/ EBIT transaction multiples above 15x. Such
traction and interest confirm the solid prospects ahead for the division and
the validity of the business plan laid out by Safran management. Combined
with the sale of detection (USD710m upcoming proceeds), Safran managed
to sell its security business for close to EUR3bn, while our approach to the
divisional valuation in our SOP was more in the range of EUR2.2-2.3bn.
Strategic review executed in a disciplined manner
It took Safran less than a year to complete the strategic review of the
security division and identify the right buyers for the respective entities. In
our view, this was a disciplined, but rather well-executed review, limiting
the related uncertainty. In comparison, the L-1 acquisition announced in
September 2010 and closed in July 2011 turned out to be a rather lengthy
process, creating an unwelcome distraction for the company.
Some time to consider use of cash proceeds
The deal announced yesterday will close in 2017, as time is needed to gain
the regulatory approvals. Together with the detection deal set to close in
early 2017, Safran will receive its EUR3bn cash proceeds at some point in
2017. This gives it time to review its cash utilisation and review/ identify all
different options at hands. At this stage, we do not thinkthat the sale of the
security means Safran is compelled to acquire a company in aircraft
equipment. In any case, the timely disposal of the security division proves
that Safran management will apply strict discipline in reviewing its options
to use the cash proceeds.
Safran remains preferred engine maker in Europe
The valuation upside derived from the deal combined with an apparently
smooth entry into service of the Leap engine are all positive for the
company. We will keep a close eye on how the company ramps up
production on the Leap and how costs are controlled. For now, however,
the company may benefit from larger-than-expected CFM56 sales in 2016
and 2017, partly offsetting the Leap ramp-up costs.