Morningstar | New Company Report for Safran
Safran is one of only a few firms in the world that can successfully develop and manufacture civil and defence jet engines, which is key to our belief that it possesses a wide moat. The growing installed base of engines with useful lives of more than 25 years results in a stable long-term annuity of future services revenue. The firm is in the sweet spot of the aftermarket cycle, benefiting from acceleration in the number of overhauls of its installed base of close to 30,000 CFM56 engines, which drive demand for high-margin spares. That said, we see headwinds for Safran, namely lower exposure to the next generation of wide-body aircraft beyond 2020, and short-term margin dilution effects from mix changes as production of the Leap engine ramps up while the mature and profitable CFM56 programme ramps down.Safran's significant investments in research and development signify a major structural competitive advantage that has secured a market-leading position in narrow-body aircraft through the CFM 50/50 joint venture with General Electric, including prominent positions on Boeing's 737 and Airbus' A320. The firm has also secured a presence in the next generation of commercial narrow-body aircraft (single-source Boeing 737 MAX, single-source Comac C919, and dual-source Airbus A320neo series). The Leap engine has close to 60% market share for future narrow bodies, with more than 13,500 orders as of December 2017.Along with its strong position in narrow-body aircraft, Safran also participates in the wide-body aircraft segment through a 23.5% stake in the GE90 (via a partnership with GE). This engine is the single-source option for the successful Boeing 777. Safran’s exposure to its successor, the GE9X, will decrease to 11%; however, Boeing aircraft powered by the GE9X will not be introduced before 2020. As the global market leader in landing systems and the world's second-largest manufacturer of braking systems and engine nacelles, Safran sells crucial aircraft equipment in the narrow-body and the wide-body market (Airbus 350, Airbus 330, Boeing 777, and 787 Dreamliner). We expect the narrow- and wide-body platforms to produce steady demand for Safran in coming decades.Safran designs, develops and manufactures high technology electronics through three businesses: Aerospace, Defense and Security. Aerospace includes Aerospace Propulsion (propulsion systems for commercial aircraft, military transport, training and combat aircraft, rocket engines, civil and military helicopters) and Aircraft Equipment (mechanical, hydromechanical and electromechanical equipment); Defense (optronic, avionic and electronic systems); and Security (biometric technologies for fingerprint, iris and face recognition, identity management products, access management and transaction security, including tomographic systems for detection of dangerous or illicit substances in baggage).
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