Profit warning driven mainly by settlement provisions, but operations on track
FY16 operating profit 10% lower vs. expectations but recovery on track
Zodiac issued a PW on Friday after market close. Full year sales are in line with previous
expectations – implying organic revenue growth in Q4. However, FY16 operating profit
is expected to be around 10% below cons. expectations of €302-303m. We estimate
that the circa €30m lower profits could be explained as: a) two thirds from higher
provisions related to settlements; b) one third due to weakness in the helicopter market
OE and AM. Furthermore Zodiac expects to satisfy the Net Debt/ Adj. EBITDA <3x
covenant for the full year implying, we believe, significant progress on improving cash
generation driven by working capital relief in Q4. Management confirms ZC is on its
trajectory of progress towards full operating recovery in Interiors by the end of 2017.
Good progress on A350 cabin deliveries, still work to be done on the ramp up
Two articles published on Friday in Les Echos and L'Usine Novelle suggest: 1) Zodiac
delivered its 64th A350 lavatory set implying good progress on the A350 production line
with only 6 sets still to deliver (UBSe) to meet Airbus' 50 a/c delivery target for 2016;
Current management attention is focused on the ramp up to 70 a/c delivery for 2017.
2) ZC opened up 7 factories to the press and the conclusions are aligned with the
company's guidance – while operational progress can be observed there is still work to
be done in our view until a return to full operating performance.
How would we expect investors to react?
While the initial market reaction to a new PW may be negative, we believe it should be
mitigated by: 1) ZC's underperformance vs. aerospace peers of 18% since the UK Leave
vote, and 11% since Q3 Sales; 2) profit miss is driven mainly by settlement provisions
while Zodiac is making good progress on operational improvements, 3) implied
improving cash generation in H2, 4) ex provisions we calculate H2 margin of 7.9%, not
far vs. FY 17 expectations (UBSe 8.5%, cons 8.8%). We expect ZC to provide more
granularity and offer guidance/indications on FY 2017 profits on 14th Sept.
Valuation: trades on 13.7x 2017 EV/EBITA, 17.6x 2017 P/E
Our €19.5 DCF price target is based on 9% WACC, 5-year profit growth of 20.5%
CAGR from FY15/16E and cash conversion of 82%, which implies a fair value multiple
of 22x FY15/16E EV/EBITA.