EUR 850.00 For Business Accounts Only

Morningstar | Leonardo Company Report

Leonardo, previously named Finmeccanica, largely completed its portfolio restructuring with the disposal of its energy business in 2013, followed by the sale of its transportation assets in 2015. With EUR 1.8 billion of proceeds and increasing profitability, management deleveraged from a staggering 7.7 times net debt/EBITDA at the end of 2013 to a more manageable 2.3 times at the end of 2017. The firm is a leading supplier of defence systems in Europe, and we believe it will benefit from the improved outlook for European defence spending.Large orders such as the 2016 contract to supply 28 Eurofighter Typhoon aircraft to Kuwait support medium-term top-line growth. Leonardo provides a significant amount of the content on the Typhoon--close to 36% of the equipment value. Additionally, operational leverage, rationalisation of the company’s industrial footprint and overhead functions, and cost controls initiated by the new management team should lead to profitability improvements. Although we like Leonardo’s radical transformation from a sprawling conglomerate into an industrial company with a special focus on aerospace, defence, and security, we do have strategic and operational concerns. First, the firm competes with larger and increasingly aggressive U.S. defence companies in the global fighter aircraft market and on other international defence deals. Second, the company’s aerostructures division is underperforming, weighing on group margins and cash flow generation. However, we still expect a gradual recovery in margins and returns in the medium term.