Morningstar | Meggitt’s FVE Raised as Higher Utilization on Expanding Installed Base Fuels Aftermarket Sales. See Updated Analyst Note from 17 Oct 2018
After updating our sales estimates for Meggitt and accounting for the time value of money, we are increasing our fair value estimate to GBX 660 per share (from GBX 630). We maintain our narrow moat rating. We increase our aftersales growth estimates for 2018 to 9% (previously 5.3%) and for 2019 to 7% (up from 5.5%) on the back of data points revealed at Meggitt’s third-quarter trading statement and conference call regarding increased utilisation on a stellar growing fleet of aircraft in operation with Meggitt equipment installed. Despite recent strong share price accretion, we still believe the market underestimates Meggitt's strong production and increased dollar value per aircraft, improved outlook for defence, and high utilisation of large jets.The metric of available seat-kilometers, which is often used as a proxy for usage of aircraft, is north of 6% for the year to date (versus our old estimate of 5%). Higher traffic growth increases demand for high-margin spare parts and breaking and landing fees. In addition to robust traffic growth, the fleet size is expanding due to low levels of aircraft retirements and eye-popping strong delivery rates of aircraft. Our analysis of Morningstar's proprietary delivery forecasts for manufacturers Airbus, Boeing, Bombardier, and Embraer leads us to forecast an average annual growth rate of jet deliveries with Meggitt content installed of 10.7% over 2018-21. In 2017, close to 2% of the installed base of aircraft were taken out of operation, representing a retirement rate substantially below the average retirement rate of 2.9% of the past decade. We expect retirement rates for 2018 and 2019 to also be close to 2% before returning to the mean in 2020, which supports Meggitt’s fleet size and civil aftersales revenue in 2018 and 2019.
Meggitt is the parent company of a group whose principal activities are the design and manufacture of components and sub-systems for aerospace, defense and other markets. Co. has five segments: Meggitt Aircraft Braking Systems, a providers of aircraft wheels, brakes and brake control systems; Meggitt Control Systems, which comprised of aircraft fire protection and control systems; Meggitt Polymers and Composites, which comprised of engine and aerodynamic seals, flexible fuel tanks and fuel systems; Meggitt Sensing Systems, a provider sensing and monitoring systems for aircraft; and Meggitt Equipment Group, which include unique heat transfer equipment for hydrocarbon processing.
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