Morningstar | Wide-Moat Safran Reports Good 2018 Results; Maintaining FVE
Wide-moat Safran reported full-year sales of EUR 21 billion, up 32% on a reported basis and 10% on organic terms. The nonorganic growth add-on was the Zodiac acquisition at 24%, which was partially offset by currency headwinds, the result of U.S. dollar weakness against the euro. Similar to the revenue line, operating income of EUR 3 billion was slightly above consensus expectations. Compared with last year, the recurring operating margin expansion of 70 basis points was mainly driven by improvements in three divisions: propulsion, aircraft equipment, and defence. We are maintaining our EUR 110Â fair value estimate and wide moat rating.The largest segment, propulsion, delivered strong 14% organic growth, driven by narrow-body engines (Leap and CFM56) and civil aftermarket services. In the aircraft equipment segment, 6% organic growth was the result of rising volume for nacelles, mainly for the A320neo. Other contributors were increased sales of equipment (for example, landing gear and wiring) for the 787 and A320 families and services (up 10% organically year on year). The 7% organic growth in military sales was driven by increases in guidance and sighting systems and portable optronics (LTLM II contract in the United States).
Management's outlook for 2019 is achievable, in our view. Full-year growth is expected to be around 5% organic and 7%-9% in reported terms, while adjusted recurring operating income is predicted to grow in the low teens.
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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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