Company Reports

Wide-moat Safran reported a strong set of results for first-quarter 2024, driven by narrow-body air traffic available seat kilometers, ahead of 2019 levels, with full-year narrow-body ASK at 113% of 2019's level and wide-body ASK at 94% of 2019 levels. The firm lowered the original equipment delivery rate of Leap engines for 2024 to 10%-15% compared with previous guidance of 20%-25% as Boeing decreased production rates below 38 planes a month in the short term to ensure stricter controls. However, Boeing plans to increase production again in second-half 2024 and deliver up to 50 planes a month by 2027. With the increase in ASK, lower deliveries, and low retirement rates, we expect strong demand in the aftermarket for legacy CFM56 engines—currently 70% of the firm's total fleet—to offset the short-term decrease in Leap engines. We maintain our fair value estimate.

Safran is a key player in global commercial and military aerospace propulsion and equipment. CFM, the 50/50 joint venture between Safran and GE Aviation, has about 70% of the narrow-body market, positioning Safran to take advantage of the aerospace industry recovery after the COVID-19 setback and the Russia-Ukraine war, which led to commodity price surges and supply chain disruptions.

Wide-moat Safran reported a strong set of results for full-year 2023, driven by narrow-body air traffic available seat kilometers, or ASK, ahead of 2019 levels, with full-year ASK at 105% of 2019's level. Strong demand in original equipment and aftermarket underpins our positive midterm outlook, and we maintain our fair value estimate.

Wide-moat Safran reported a strong set of results for the third quarter, driven by narrow-body air traffic available seat kilometers ahead of 2019 levels, with second-quarter ASK at 107% of the third-quarter 2019 level. Management raised its revenue outlook for the full year. Narrow-body demand ahead of 2019 levels, coupled with pent-up demand in original equipment and aftermarket, supports our 2023 view, and we maintain our fair value estimate.

After taking a fresh look at Safran, MTU Aero Engines, and Rolls-Royce, we have confirmed our economic moat ratings but materially increased our fair value estimates to account for a post-COVID-19 air traffic recovery in civil aerospace and pent-up demand in the original equipment segment and aftermarket.

Safran is a key player in global commercial and military aerospace propulsion and equipment. CFM, the 50/50 joint venture between Safran and GE Aviation, has about 70% of the narrow-body market, positioning Safran to take advantage of the aerospace industry recovery after the COVID-19 setback and the Russia-Ukraine war, which led to commodity price surges and supply chain disruptions.

Wide-moat Safran reported a strong set of results for the first half, driven by narrow-body air traffic available seat kilometers ahead of 2019 levels, with second-quarter ASK at 104% of the second-quarter 2019 level. Management raised its EBIT and cash flow outlook for the full year. Safran is consolidating its market position in Airbus' A320neo with win rates higher than the 70% figure in 2022. Narrow-body demand ahead of 2019 levels coupled with pent-up demand in original equipment and aftermarket supports our 2023 view, and we maintain our fair value estimate.

Safran announced the acquisition of Collins' actuation and flight control systems business for $1.8 billion in an all-cash deal, expected to be completed in 2024. We believe the strategic fit of the acquisition is strong and moat-accretive, and the valuation appears fair in our view. Our EUR 160 fair value estimate and wide moat rating are unchanged.

Wide-moat Safran reported strong first-quarter revenue of EUR 5.2 billion, in line with management’s outlook for the year. All segments contributed to the group's organic revenue growth at 25%—notably services in all divisions and civil aftermarket in particular, and a good increase in LEAP deliveries. The recovery observed in narrowbody air traffic ASK (available seat-kilometers) brought traffic back to pre-COVID-19 levels, which supports our assumption for full-year 2023. The lifting of travel restrictions in China in mid-December 2022 played a significant role in the recovery, with CFM cycles also recovering to 2019 levels in North America, Europe, and China. However, the Asia-Pacific region, excluding China, is still at 80% of its 2019 level. Management remains vigilant on supply chain difficulties but reiterates its ability to offset inflation and meet its financial objectives for 2023. We maintain our fair value estimate of EUR 160.

As a leading Tier 1 supplier with high narrow-body aircraft exposure, Safran is well-positioned to benefit from the long-term growth outlook of the aerospace industry. The travel restrictions and economic impact of the coronavirus is a damper on demand for air travel over the medium term, but we believe once growth returns the industry should outperform global GDP growth underpinned by the global wealth effect, especially in Asian markets.

Wide-moat Safran exited 2022 with robust organic revenue growth of 16%, which together with margin expansion led to a 28% organic increase in recurring operating income. The business expanded group-level recurring operating margin by 80 basis points to 12.6%. Group-level margin benefited from a positive mix effect with high growth in the largest and most profitable division, aerospace propulsion. The division grew organic revenue by 18%, outpacing group-level growth, but also importantly at an 18% operating income margin was more than 500 basis points above the group. Equipment deliveries and aftermarket services growth drove the aerospace propulsion division's revenue, with an increase in volume for LEAP engine deliveries (1,136 versus 845 in 2021) and 29% growth in aftermarket revenue (in U.S. dollar terms). The results were in line with guidance, raised with the third-quarter 2022 results. We maintain our EUR 160 fair value estimate.

As a leading Tier 1 supplier with high narrow-body aircraft exposure, Safran is well-positioned to benefit from the long-term growth outlook of the aerospace industry. The travel restrictions and economic impact of the coronavirus is a damper on demand for air travel over the medium term, but we believe once growth returns the industry should outperform global GDP growth underpinned by the global wealth effect, especially in Asian markets.

Wide-moat Safran once again raised full-year 2022 revenue and free cash flow guidance on the back of currency moves and growth in services. Revenue is expected to be EUR 19 billion (EUR 18.3 billion previously), while free cash flow is anticipated to exceed EUR 2.4 billion. Reported group sales increased by 30% in the third quarter, composed of 18% organic growth and 12% currency tailwinds. All divisions grew, but the most notable growth driver remains the civil aftermarket, which benefits from the recovery in narrow-body flying hours.

No major surprises as wide-moat Safran reported organic revenue and recurring operating income growth of 17% and 54%, respectively. Reported top-line growth of 24.5% was boosted by favorable U.S. dollar/euro foreign exchange moves. Growth was driven by the continued recovery in narrowbody aircraft traffic and the demand for services across all business divisions. Full-year sales and free cash flow guidance was increased mainly on the back of foreign exchange moves in the former and advanced payments for the latter. Midpoint sales of EUR 18.3 billion is now expected to be 1% higher on the back of a 4% strengthening of the U.S. dollar versus the euro, which actually implies a 3% lowering of the organic guidance. We attribute this to supply chain bottlenecks affecting delivery schedules. The 13% operating margin target is unchanged.

The key theme from wide-moat Safran’s first-quarter 2022 sales update remains inflation and supply chain disruptions, exacerbated by the Russia-Ukraine conflict. The group suspended operations in Russia, which will have a 2% impact on sales and an estimated 70-basis-point margin headwind. Additionally, raw material and energy cost inflation will have an 80-basis-point impact on group margins. Management believes further cost savings will be sufficient to offset the 150-basis-point impact and maintains previous full-year 2022 margin guidance of 13%. Safran, which sources 50% of its titanium from Russia, has secured supplies for 2022 and is looking at alternative suppliers in future. Shifting supply chains for certified cast parts is complicated and we believe the inflationary effects could last beyond the current year. We make no changes to our EUR 150 fair value estimate and shares remain attractive for this wide-moat company.

In light of supply chain bottlenecks and potential raw material shortages, which have intensified as a result of the war in Ukraine, we reassess our forecasts for wide-moat Safran, wide-moat MTU Aero and narrow-moat Rolls-Royce. After making short-term downward adjustments for sales growth and profitability the fair values of the firms in question do not change significantly. This is due to the long-term nature of their respective sales cycles, with the bulk of the value captured in later years. Safran’s fair value estimate remains unchanged at EUR 150 per share, while MTU Aero’s is lowered to EUR 200 per share from EUR 212, and Rolls-Royce’s fair value estimate is now GBX 105 (ADR: $ 1.40) compared with GBX 115 (ADR: $1.60), previously. We continue to prefer Safran, which trades at a hefty discount to our fair value estimate, while Rolls-Royce and MTU Aero are trading near fair value territory.

As a leading Tier 1 supplier with high narrow-body aircraft exposure, Safran is well-positioned to benefit from the long-term growth outlook of the aerospace industry. The travel restrictions and economic impact of the coronavirus is a damper on demand for air travel over the medium term, but we believe once growth returns the industry should outperform global GDP growth underpinned by the global wealth effect, especially in Asian 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.

Wide-moat Safran reported 2021 EBIT in line with guidance while revenue was slightly disappointing. Revenue declined 5.4% organically due to lower-than-expected LEAP engine deliveries (845 versus 900 as previously guided) caused by supply chain disruptions in the U.S. during the fourth quarter. A mix shift to high-margin aftermarket sales supported group EBIT growth of 8.4%, with margins expanding by 160 basis points to 11.8%. Positive working capital movements and improvement in profitability saw strong growth in free cash flow to EUR 1.7 billion, from EUR 1.1 billion in 2020. Guidance for 2022 implies 17% growth in revenue while the EBIT margin is expected to increase to 13%, which compares with a 15.3% precoronavirus margin. Sales growth and margin expansion is supported by 25%-30% anticipated growth in aftermarket sales and the ramp-up of LEAP engine deliveries.

We increase our fair value estimate for wide-moat Safran to EUR 150, from EUR 142 as we anticipate a sharper recovery in aftermarket revenue in the short term, complimented with above-market growth in the longer term. Trading in 4-star territory, Safran is one of the top picks in our European aerospace and defense coverage. The coronavirus pandemic hit earnings hard, with first-half 2021 EBIT still 65% below 2019 levels.