Lacklustre oil and gas markets failed to dampen enthusiasm for this "solid set of numbers" from Meggitt (MGGT) - a provider of components and sub-systems to aerospace, defence and energy markets. After a difficult 2014, the shares have regained momentum as investors took heart from soaring demand for aircraft parts.
Record order backlogs at Airbus and Boeing spurred a 5 per cent increase in organic revenue at Meggitt's core civil aerospace segment. Appetite was particularly strong for business jet parts and the group's wheels and brake control systems, a trend that shows no sign of abating as demand for air travel continues to soar.
Despite a surge in profitable aftermarket products, substantial investment in new products led underlying operating margins to tighten by 0.9 percentage points. "In the next five years, 15 significant new programmes are entering into service," says boss Stephen Young. That’s double the normal rate and explains why research spending reached a tenth of revenue at £79m and is expected to remain "elevated" for the next few years.
Profits were also impacted by an 18 per cent drop in organic energy revenue as customers responded to a low oil price by scrapping projects. The high fixed costs of the Heatric business meant it suffered most, leading management to realign its cost base. Fortunately, Heatric's woes were offset by a return to prosperity for the military division. This unit, which accounts for a third of group revenues - half of which are generated from the US Department of Defense - found solace in repair work on helicopters and training contracts. The upshot was organic sales growth of 6 per cent, prompting Mr Young to proclaim that "the worst of the budget cuts is over."
Meggitt was also buoyed by an 85 per cent spike in free cash flow, stemming mainly from improved working capital arrangements. Impressive customer collections suggest the benefits of Meggitt's Production System - a six-phase programme designed to provide a "gold-standard" service - are filtering through. Indeed, management reports that defective parts per million are down 86 per cent and on-time deliveries are up a tenth since the programme was introduced in 2013. More cash, however, didn’t halt net debt from swelling a quarter to £712m - blamed on a £102m share buyback.
Broker Investec forecasts adjusted EPS of 36.7p in the year to December, rising to 41.7p in 2016 (FY 2014: 31.9p).
| MEGGITT (MGGT) | ||||
|---|---|---|---|---|
| ORD PRICE: | 489p | MARKET VALUE: | £3.8bn | |
| TOUCH: | 488-489p | 12-MONTH HIGH: | 594p | LOW: 422p |
| DIVIDEND YIELD: | 2.9% | PE RATIO: | 20 | |
| NET ASSET VALUE: | 265p* | NET DEBT: | 34% | |
| Half-year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 719 | 98 | 10.2 | 4.25 |
| 2015 | 794 | 116 | 12.5 | 4.60 |
| % change | +10 | +18 | +23 | +8 |
Ex-div: 3 Sep Payment: 2 Oct *Includes intangible assets of £2.2bn, or 277p a share | ||||
