Morningstar | Leonardo Reports Light 3Q but Reaffirms Guidance, Including Cash Flow
Leonardo missed consensus forecasts for the third quarter on reported revenue and operating margin but reaffirmed full-year guidance, implying a significant fourth-quarter contribution to free cash flow, in line with previous years. We are maintaining our no-moat rating and EUR 12 fair value estimate.Group free cash flow and the helicopter division's recovery are key targets for investor confidence in Leonardo, given the earlier delays in reaching healthier free cash generation after the drop-off in helicopter orders in the past couple of years. (In 2017, the company posted a 42% group order book decline and 24% drop in free cash flow, namely driven by a nearly 400-basis-point decline in the helicopter division margins after the division's order book shrank 16%.) To right the ship, management set out medium-term targets. Although the third-quarter results were light versus expectations, the nine-month results show some progress towards reaching the medium-term targets.
In the first nine months, revenue grew 4% on an organic basis compared with the medium-term targets of 5%-6% annually. The order book showed stronger growth, up 18%, encouragingly driven by the helicopter division with a large NH90 order from Qatar. Orders in the segment amounted to 2.7 times the year-ago period; however, excluding the EUR 3 billion Qatar order, year-over-year performance would have been flat. Revenue from the Qatar order will flow through in 2022-25. The EBITA margin (interchangeably referred to as ROS by the company) was less encouraging, slipping 90 basis points year over year to 7.7%. This is well below the medium-term 10% target, but management maintained full-year guidance, which implies a material improvement in the fourth-quarter margin to reach the indicated EBITA low-end margin of just below 9%. This looks ambitious but could be achievable, given the historical lumpiness of the company's margins.
Leonardo is the holding company for The Finmeccanica Group, and is responsible for guiding and controlling industrial and strategic operations, coordinates its subsidiaries. The Finmeccanica Group operates in the Aerospace and Defence sector, which includes the Helicopters, Defence and Security Electronics, Aeronautics, Space and Defence Systems segments; and in the Transportation sector, which also includes Fata S.p.a., in addition to the companies operating in the transportation sector.
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