Morningstar | Launching Coverage of MTU Aero Engines With Wide Moat Rating and FVE of EUR 165; Shares Expensive
We are initiating coverage of MTU Aero Engines, a Tier 1 engine supplier with development responsibilities through partnerships with Pratt & Whitney and General Electric, with wide, stable moat ratings and a EUR 165 fair value estimate that implies 2019 adjusted P/E and EBITDA multiples of 18 times and 11 times, respectively. Current share prices are about 25% above our fair value.Engine manufacturers like MTU are competitively well-positioned in the complex aerospace supply chain. The potential risk of airframers, such as Airbus and Boeing, to develop additional aircraft manufacturing activities in-house is low at the engine level. Engines require technical knowledge and engineering capabilities, and program lives span decades, securing long-term demand for spare parts. Engines components are protected from third-party replication through intellectual property, engineering complexity, and certification requirements, since their critical nature increases regulator scrutiny.
We believe the market has already incorporated the growth expectations from new engines and spare parts demand. Our forecasts call for MTU to expand its operating margins by 160 basis points at the end of 2022 and to reach 15.7% EBIT by the end of our explicit forecast in 2028 from the current 13.3% adjusted EBIT margin, mainly the result of favorable mix between spare parts and new engines.
Our investment thesis is based on favorable trends for air transport demand, as the International Air Transport Association predicts that the number of passengers could double by 2037. New markets (new routes and destinations), especially in the Asia-Pacific regions, are not the only driver, since airline purchases are incentivized by new, more efficient engines. The GE-Safran joint venture and Pratt & Whitney partnership with MTU has already introduced the latest generation of engines, delivering more economical and environmentally friendly engine options.
MTU Aero Engines manufacturers engine modules and components, and providers MRO (Maintenance, Repair and Overhaul) services for commercial aero engines. Co.'s activities range through the development, construction, testing and production of new commercial and military engines and spare parts, through to maintenance, repair and overhaul of commercial and military engines. Co.'s segments comprised of: OEM business (Original Equipment Manufacturing), which covers new commercial engines, including spare parts, and the whole of the military sector; and MRO business, which engaged in commercial maintenance activities covering the areas of maintenance and logistical support for commercial engines.
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