EUR 850.00 For Business Accounts Only

Morningstar | Stellar Results for Safran as Leap Deliveries and Service Revenue Accelerate in 3Q

Wide-moat Safran reported impressive results for the third quarter as adjusted revenue was up 11.4% year over year organically (30.9% reported), fuelled by strong momentum in aerospace services (notably, the civil aftermarket was up 19.2% in U.S.-dollar terms, driven by CFM56 spares sales and fees for takeup and landing) and strong growth in defence (up 10% organically, mainly due to increasing military guidance systems). As expected, deliveries of CFM56 engines declined (243 in the third quarter versus 366 a year ago) as airframes like Boeing and Airbus transition to production towards neo and Max aircraft. However, the large installed base of CFM56 units and the ramp-up of the next-generation Leap engine (303 delivered up from 110 the previous year) open the door for strong highly profitable aftersales in coming years. We expect a slightly lower growth rate for civil aftermarket in the next quarter as the beneficial effects of variations in revenue recognition of the first nine months of the year largely reverse in the fourth quarter. We are updating our estimates for recent developments, which could result in modest changes (less than 5%) to our fair value estimate of EUR 110 per share. We believe Safran shares are fairly valued.

Safran's stellar adjusted revenue growth was driven by good performance for all three divisions. Aerospace propulsion revenue grew 12.1% organically, benefiting from strong momentum for narrow-body engines and increased helicopter turbine volumes. Increased deliveries of nacelles for the A320neo (124 units in the third quarter versus 34 a year ago) and strong sales of wiring shipsets and landing gear to Boeing for the 787 programme boosted Safran’s aircraft equipment revenue, up 10.9% in the quarter. Strong sales momentum at defense continued in the quarter, up 10% year over year on an organic basis, owing to high demand for guidance systems and avionics equipment sales.

We are happy with the increased production of the Leap, Safran's next-generation engine, as the firm extracts high-margin aftersales services of the large installed base of engines and brakes that it successfully built in 2018 and previous years. Year to date, Safran has delivered 741 units to Airbus and Boeing, and it is clearly on track to deliver our expected target of 1,100 Leap engines in 2018. The combined backlog of the CFM56 and Leap engine programmes amounts to more than 15,000 engines, representing more than seven years of production, and we expect solid execution on delivering and maintenance of these engine.