Company Reports

Leonardo reported a strong performance in the first half of 2024, with new orders increasing by 15.6% compared with the same period of 2023. This growth pushed the backlog to EUR 43 billion, resulting in a book/bill ratio of 1.3, achieved without relying on large, one-time orders, with consistent growth across all divisions.

Narrow-moat Leonardo reported strong results for first-quarter 2024, driven by defense electronics and helicopters. We increase our fair value estimate to EUR 27 from EUR 23 to account for increased long-term growth. We're increasing our long-term growth rate from 3% to 5% to account for an acceleration of European countries' commitment to increase their defense spending. Overall, the latest industry estimates show a cumulative increase of over $500 billion for the next decade compared with last year's predictions.

Leonardo has a well-diversified portfolio across geographies and platforms, with 83% of its revenue from defense and 17% from civil. Escalating global security concerns are driving higher growth in the defense market, which will be uninterrupted for at least several years, as many countries in Europe have underspent since the end of the Cold War. The company is strategically well positioned to benefit given its significant stakes in a broad array of major international defense projects.

We are increasing our fair value estimate for narrow-moat Leonardo to EUR 23 from EUR 16.60 previously. In addition to changes in our long-term volume and margin assumptions, we also reduced our cost of equity to bring Leonardo in line with other stocks under our European defense coverage. However, we are increasing our Morningstar Uncertainty Rating to High, from Medium, partly to reflect Leonardo's higher financial leverage compared with peers and to account for the wider range of potential equity value that it brings.

Leonardo has a well-diversified portfolio across geographies and platforms, with 83% of its revenue from defense and 17% from civil. Escalating global security concerns are driving higher growth in the defense market, which will be uninterrupted for at least several years, as many countries in Europe have underspent since the end of the Cold War. The company is strategically well positioned to benefit given its significant stakes in a broad array of major international defense projects.

We are reinitiating coverage on Leonardo with a narrow moat and a fair value estimate of EUR 16.6 per share. This reflects anticipated higher defense spending due to global threats and expanding margins from improved product mix.

Leonardo has a well-diversified portfolio across geographies and platforms, with 83% of its revenue from defense and 17% from civil. Escalating global security concerns are driving higher growth in the defense market, which will be uninterrupted for at least several years, as many countries in Europe have underspent since the end of the Cold War. The company is strategically well positioned to benefit given its significant stakes in a broad array of major international defense projects.

Leonardo has a well-diversified portfolio across geographies and platforms, with 83% of its revenue from defense and 17% from civil. Escalating global security concerns are driving higher growth in the defense market, which will be uninterrupted for at least several years, as many countries in Europe have underspent since the end of the Cold War. The company is strategically well-positioned to benefit given its significant stakes in a broad array of major international defense projects.

We are dropping coverage of Leonardo. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

No surprises as Leonardo reported first-half results in line with expectations. Order intake increased by 9.4% year on year to EUR 7.3 billion, driven by all divisions. Sales and EBITA growth of 3.6% and 11.8%, respectively, was characterized by the ramp-up of activity in helicopters and defense electronics and security, offset by continued weakness in the group’s aerostructures business. Guidance for the full year was maintained, which implies sales and EBITA growth of 5% and 7%, respectively. We maintain our EUR 13.50 fair value estimate and believe shares offer decent upside. Share prices increased in line with defense peers since the outbreak of the war in Ukraine on the back of expectations that defense spending will increase globally.

We increase our fair value estimate for Leonardo by 6% to EUR 13.50, from EUR 12.75 previously, as we incorporate higher growth across the group’s defense markets. The group, which has exposure to the Typhoon fighter jet program, military helicopters and defense electronics is well positioned to capture growth from higher defense budgets. We increase growth only slightly in the short term, as we believe the benefits of higher defense spending will flow through over the medium term in incremental intervals.

Leonardo has undergone a long and painful transition from a holding company housing strategic political and economic Italian state industrial assets to a more focused aerospace and defense business. The crown jewel in the portfolio is the helicopter business, which houses the well-known AgustaWestland brand with best-in-class profitability. The defense, electronics, and security, or DES, division hosts a diverse set of sensors, solutions, and systems for domestic and export military customers. Ongoing restructuring in the aerostructure business offsets the rosier prospects of the aircraft business in the aeronautics segment. The current portfolio makes strategic sense, and we believe the group is in a fair position to compete in the mature but stable aerospace and defense markets.

Germany’s boost in defense spending, announced Feb. 27, will benefit most European defense contractors and could lead to multiyear increases in the growth outlook for these companies. While it is early days and very difficult to quantify the exact impact, we expect to make positive adjustments to our defense coverage. Of the pure-play defense names, narrow-moat Thales, Dassault, and Leonardo trade at discounts to our fair value estimates while wide-moat BAE Systems trades at a premium. We don’t believe our revisions will change this ranking by much, and our preference is for Thales and Dassault. Despite the impact from a demand and cost perspective on the airline and commercial aerospace companies we cover, we don’t foresee any structural long-term changes to their prospects and as such don’t anticipate any major changes to our fair value estimates. We maintain our preference for wide-moat Safran and no-moat Wizz Air under our aerospace and airline coverage, respectively.

Narrow-moat Leonardo continues its recovery from the low base in 2020. Order intake of EUR 8.5 billion for the first nine months increased 8.9% year on year, with order growth in the electronics and aircraft divisions offset by declines in the helicopter and aerostructure businesses. All segments, except aerostructure, contributed to group revenue and EBITA growth of 6% and 22%, respectively. The group EBITA margin of 6.3% for the first half remains below the 7.5% precoronavirus level as the aerostructure business remains loss-making due to low commercial aircraft deliveries. Guidance for EBITA growth of approximately 17% and positive free cash flow generation of EUR 100 million in 2021 is maintained. In the short term, military and government business is expected to remain robust, while the civil aeronautics business will continue to be a drag on results. Over the medium term, group sales will be driven by the delivery of Typhoon fighter jets to Kuwait and a recovery in civil helicopter and aeronautics markets. Shares continue to trade at a deep discount to our EUR 12.75 fair value estimate.

Leonardo has undergone a long and painful transition from a holding company housing strategic political and economic Italian state industrial assets to a more focused aerospace and defense business. The crown jewel in the portfolio is the helicopter business, which houses the well-known AgustaWestland brand with best-in-class profitability. The defense, electronics, and security, or DES, division hosts a diverse set of sensors, solutions, and systems for domestic and export military customers. Ongoing restructuring in the aerostructure business offsets the rosier prospects of the aircraft business in the aeronautics segment. The current portfolio makes strategic sense, and we believe the group is in a fair position to compete in the mature but stable aerospace and defense markets.

Leonardo has undergone a long and painful transition from a holding company housing strategic political and economic Italian state industrial assets to a more focused aerospace and defense business. The crown jewel in the portfolio is the helicopter business, which houses the well-known AgustaWestland brand with best-in-class profitability. The defense, electronics, and security, or DES, division hosts a diverse set of sensors, solutions, and systems for domestic and export military customers. Ongoing restructuring in the aerostructure business offsets the rosier prospects of the aircraft business in the aeronautics segment. The current portfolio makes strategic sense, and we believe the group is in a fair position to compete in the mature but stable aerospace and defense markets.

Narrow-moat Leonardo continues its path recovery as the group reports first-half 2021 results. Order intake of EUR 6.7 billion increased 9.5% year on year, with order growth in the electronics and aircraft divisions offset by declines in the helicopter and aerostructure businesses. All segments, except aerostructures, contributed to group revenue and EBITA growth of 7.9% and 37%, respectively. Group EBITA margin of 6.3% for the first half remains below the 8.2% prepandemic level as the aerostructure business remains loss-making due to low commercial aircraft deliveries. Guidance for EBITA growth of approximately 17% and positive free cash flow generation of EUR 100 million in 2021 is maintained. In the short term, the military and governmental business is expected to remain robust, while the civil aeronautics business will continue to be a drag on results. Over the medium term, group sales will be driven by the delivery of Typhoon fighter jets to Kuwait and a recovery in civil helicopter and aeronautics markets. Share price recovery has lagged peers and are currently trading at a deep discount to our fair value estimate of EUR 12.15.

Narrow-moat Leonardo reported improved first-quarter 2021 results off a low comparable base. We note the first quarter is seasonally insignificant, with very little readthrough for the remainder of the financial year. Order intake remained flat year over year at EUR 3.4 billion, with growth in orders in the electronics and aircraft divisions offset by declines in the helicopter and aerostructure businesses. All segments, except aerostructure, contributed to group revenue and EBITA growth of 7.7% and 131%, respectively. Guidance for EBITA growth of approximately 17% and positive free cash flow generation of EUR 100 million in 2021 is maintained. In the short term the military and governmental business is expected to remain robust, while the civil aeronautics business will continue to be a drag on results. Over the medium term, group sales will be driven by the delivery of Typhoon fighter jets to Kuwait and a recovery in civil helicopter and aeronautics markets. Shares are currently trading at a deep discount to our fair value estimate of EUR 12.15.

Leonardo has undergone a long and painful transition from a holding company housing strategic political and economic Italian state industrial assets to a more focused aerospace and defense business. The crown jewel in the portfolio is the helicopter business, which houses the well-known AgustaWestland brand with best-in-class profitability. The defense, electronics, and security, or DES, division hosts a diverse set of sensors, solutions, and systems for domestic and export military customers. Ongoing restructuring in the aerostructure business offsets the rosier prospects of the aircraft business in the aeronautics segment. The current portfolio makes strategic sense, and we believe the group is in a fair position to compete in the mature but stable aerospace and defense markets.

Narrow-moat Leonardo reported a 25% drop in EBITA for 2020, an improvement from the 40% decline in the first half, which suffered from productivity and delivery delays. Sales and orders are down 2.5%, with growth of the order intake in the defense and aircraft divisions offset by a 38% decline in the aeronautics order intake, as civil aircraft demand continues to battle the coronavirus downturn. Free cash flow of EUR 40 million for the full year saw a sharp recovery from the EUR 2.6 billion outflow reported for the first nine months. Midpoint guidance for 2021 implies revenue and EBITA growth of 4.5% and 17%, respectively, as military end markets remain robust while the civil aeronautics business continues to be a drag. Over the medium term group sales will be driven by the delivery of Typhoon fighter jets to Kuwait and a recovery in civil helicopter and aeronautics markets. Our fair value estimate of EUR 11.80 remains unchanged and reflects huge upside from the current price, but we highlight that our forecasts come with a high degree of uncertainty due to the lumpy nature of revenue and high operational gearing.