Morningstar | Stellar Order Growth for Meggitt in First Half and Interim Dividend Up 5%
Narrow-moat Meggitt reported strong half-year sales of GBP 952 million, up 9% after correction for disposals and currency effects versus the year-ago period. Revenue was in line with our expectations, and 11% growth in civil aerospace aftermarket sales over the first six months supports our view that the market share price does not fully reflect the firm's growth and profitability recovery potential, as Meggitt benefits from an improved outlook for defence, our expected strong upcycle in civil aircraft deliveries, and high utilisation of large aircraft following air traffic growth north of 5% for the medium term. We maintain our fair value estimate of GBX 630 per share for the London-listed shares.Meggitt’s increased equipment sales content on new growing aircraft platforms like Airbus A320neo series (20% higher original equipment shipset dollars versus old A320ceo series), A350 (250% increase compared with A330) and Boeing 737MAX (up 55% versus B737) will drive increased aftermarket sales for decades. In the first half, Meggitt order intake increased an eye-popping 24% compared with last year, with the main highlights being the contract wins with launch customer Wizz Air for wheels and brakes on the Airbus A321neo and the agreement with Textron Aviation for wireless tyre-monitoring systems.
Largely in line with our expectations, first-half profitability declined (operating margin declined 90 basis points year on year) due to temporarily elevated costs at the Meggitt Polymers & Composites business and margin dilution because of a high level of deliveries of aircraft platforms with the firm’s free-of-charge braking shipset. This free-of-charge selling proposition for new aircraft is margin-dilutive in the beginning, but the typical 18- to 24-month replacement cycle from brakes on high-utilisation civil aircraft results in strong high-margin aftermarket revenue over the 20-year-plus life of the aircraft.
We expect the Meggitt group EBIT margin will strengthen by 90 basis points over 2017-22 due to efficiency gains, increasing contribution from the higher-margin aftermarket, lower R&D spend, and new product introduction cost as percentage of sales, along with the successful addressing of production issues within the Meggitt Polymers & Composites business.
More than 50% of Meggitt's revenue is derived from civil aerospace, where the firm has market-leading aircraft component positions in brakes, engine management systems, seal packages, and composite airframe and engine assembly. High-margin aftermarket revenue is dependent on equipment deliveries and utilisation of large helicopters and business jets. Both factors developed positively in the first half, supporting our positive stance on margins. Meggitt’s jet equipment revenue grew 4% due to increased shipset value and strong growth for the Airbus A320neo series, A350, and Boeing 737MAX. Business jet original equipment revenue returned to growth for the first time since 2015 (organic revenue growth of 18% year on year) with strong demand for Meggitt’s products on Legacy 500 and Global 700 aircraft. Air traffic, a key indicator for utilisation of large aircraft, grew 6% globally in the five months to May, and we expect mid-single-digit traffic growth to continue over our five-year forecast period (especially in narrow-body aircraft).
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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