Business Description:
Civil aerospace business accounted for 51% of revenues in FY19 and 41% in FY20 (ended in December 2020)
Industry hit by Covid-19 Pandemic in 2020, causing a 37% drop in revenues in Civil Aerospace business segment
Focused on widebody aircraft engines
Has 55% of market share of widebody order book as of 2019 with 43% of market share in 0-10 years old widebody and 12% in 20-30 years widebody. Typical widebody retirement window is 25 years
Defence accounted for for 20% of revenues in 2019 and 29% in 2020
Main product fighter jet engines
50% from US military contracts, 25% from UK and the rest exports to other countries such as India and Japan
Power Systems accounted for 22% of revenues in 2019 and 22% in 2020
Provider of high-speed and medium-speed reciprocating engines, and complete propulsion and power generation systems
Total Backlog of GBP 53.7 Billion in 2020 vs GBP 60.9 Billion in 2019
Catalysts:
Recovery of from the pandemic
Stability of the defence business
Growing market share in widebody aircraft engines
Risks:
Lower demand for new aircraft
Raising capital through share dilutions
Brexit may affect exports to the EU and relations to main customer, Airbus
Currency fluctuations
Financial Analysis:
Revenues of GBP 11.8 Billion in FY20 down from GBP 16.5 Billion in FY19
Operating loss of GBP 2.27 Billion in FY20 vs loss of GBP 956 million for FY19
Net loss of GBP 3.17 Billion in FY20 vs net loss of GBP 1.31 Billion for FY19
Negative Free Cash Outflow of GBP 4.2 Billion in FY20 vs FCF GBP 873 million for FY19
Balance Sheet
Total assets: GBP 29.5 Billion ; total liabilities: GBP 34.4 Billion; book value: Negative GBP 4.9 Billion
Cash: GBP 3.3 Billion, debts: GBP 4.2 Billion, current assets: GBP 14.6 Billion, current liabilities: GBP 13.9 Billion
6.3 Billion shares outstanding vs 5.9 Billion in FY19
GBP 2.0 Billion may be raised by issuing new shares
Valuations
My personal Biases:
Skeptical about their optimistic forecasts
New to the Analysis of the Defence and Aerospace Industry
Assumptions for base case:
65% of 2019 Civil Aerospace revenues in 2021, 80% in 2022, 90% in 2023, 100% in 2024 and 105% in 2025
3.5% annual growth in Defence Revenues
3.5% annual growth in Power System Revenues
3% annual growth in other other revenues
Civil Aerospace gradually improves on operating margins until 5% is reached in 2025
Power Systems and Defence maintains an average operating margin of 13% each
FCF discounted at 15% with terminal growth rate of 3% after 2025
Use Price to FCF ratio as exit multiples given correlation between Price and FCF
Price to FCF ratio ranged from 5 to 240 (due to very over the TTM FCF) in last 10 years
Use Range of 5-20 for exit multiples
Share dilution of 20% in the next 5 years
Bear case 0.6% of base case FCF and bull case 1.2% of base case FCF
Conclusion
Overvalued with intrinsic value of GBP 5.7 Billion with market cap of GBP 8.8 Billion
Exit Multiples based on P/FCF shows only a 10% annual expected returns in 5 years with a big downside in worst case scenario
Big margin of safety needed with all the uncertainties surrounding the industry
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