Meggitt hopes pinned on second half

Defence cuts are all the rage and Meggitt (MGGT) depends on the military for almost 40 per cent of sales. Management, however, has not been idle and, led by chief executive Terry Twigger for the past 12 years, the engineer has built up a substantial commercial aerospace and energy business. New boss and former finance chief Stephen Young inherits a company in good shape, but one which admits that growth will be less impressive in 2013.

Meggitt is sticking with forecasts for mid to single digit revenue growth, but as with many companies recently expects much of that to come through in the second half, driven by a recovery in higher-margin civil aftermarket work following a period of industry destocking. Group sales grew only "modestly" during the first quarter and, given the brevity of its quarterly statement, we know little of the breakdown across the company's divisions. However, it seems obvious the first three months of 2013 were slow on the civil aftermarket side, in line with foreign peers. And Meggitt has already warned that sales to defence customers will be flat in 2013 and might even fall if sequestration bites, which leaves the fast-growing energy unit to pick up the slack.

Investec Securities says...

Buy. Our forecasts assume the second-half recovery in the civil aftermarket will happen and continue to anticipate 7 per cent revenue growth for the full year. Comforting comments and the fact that there are no negatives should also be share price supportive. Meggitt also continues to de-gear, with the "very strong" financial position expected to improve further over time. This steady update looks fine in the context of the group's long-term structural growth story in civil aerospace, with the added spice of potentially very high growth in energy. We see the valuation metrics as undemanding, and so retain our 520p price target.

Liberum Capital says...

Hold. US sequestration will have an impact on the Pentagon's operational and maintenance budgets this year, but positive trading within civil aerospace and energy exposure will offset this. OAG aviation data is indicating 4-5 per cent growth through the summer. Given that we estimate a year-end net debt-to-cash profits ratio of 1.1, we doubt it will be long before another acquisition is sought. Our forecasts are for 5 per cent revenue growth in both 2013 and 2014, to boost EPS from 35.7p to 37.9p, rising to 42.2p in 2014. The Paris Airshow in June is the next sector catalyst.