Airbus has just published its AGM documentation (AGM on 27th May) – in this, the company seeks authorisation to buy back up to 10% of the company's issued share capital, in order to give management the "flexibility to review capital allocation options going forward, in particular with regard to using proceeds from divestments and to returning a portion to shareholders". We would note that this is not a declaration to repurchase 10%, but gives management the potential to do so if deemed appropriate.
Reducing risk and disposals drive capital allocation review
At FY2014 results, Airbus announced that it would be reviewing its capital allocation in the light of the planned disposals (Dassault stake, plus parts of ADS) and the reduction of technical risk over the next year or so (as it works through the challenges of the A400M and A350 ramp-up) should be matched by a reduction in the financial buffer that the company has through its net cash position.
10% buy-back at current price gives ~9-10% Earnings accretion
We estimate thatif they initiate a 10% buy-back at current prices, using cash funding, it would cost about €4.9bn and give about 9-10% earnings accretion (given the very low yield on cash). Although we value Airbus on EV/EBITA and so see little change to our fair value (Equity value increases, but cash position decreases), we expect the stock to be up.
Valuation:trading on 12.5x '15 EV/EBITA but large $/€ beneficiary post hedges
Our €72 price target is based on DCF using $/€ of 1.15, 68% cash conversion, 22.9% CAGR profit growth from 2015e, 9%WACC, which implies 15.4x 2015EV/EBITA and €76. We apply on top a 5% discount for potential A350/A380 problems. The very strong 5 year profit growth is in part from the underlying growth in profitability as the A350 moves from loss to profit, but also from the very strong tailwind from FX.