Over recent years engineer Meggitt (MGGT) has invested heavily to entrench more products in key civil aerospace programmes. Spending has hit record levels, but should start to come down over the coming years. This will give the company the chance to focus on improving operating efficiency and cash generation while benefiting from aftersales work linked to its increased market penetration. Given that the shares currently trade near a five-year low based on a multiple of sales (a useful metric for trying to identify recovery situations), we see plenty of potential upside should management succeed in its ambition to lift margins by between 200 and 250 basis points by 2021 while releasing £200m of excess cash. The company should be helped along the way by weak sterling, as well as the potential for a rising oil price to improve trading at its troubled energy division (7 per cent of revenue) and a Trump-induced rise in defence spending to benefit the military division (35 per cent of revenue).
- Potential recovery in some end markets
- Reduction in net debt multiple
- Development expenditure peaking
- Plans to boost margins and cash
- High pension deficits and intangibles
- Faltering aftermarket sales
Meggitt has been working on repairing its reputation since it warned on profits in October 2015. Its problems, in the main, were linked to an industry-wide retirement of large jets which hit the group's aftermarket business. Although this dynamic is still in evidence, the influence of the customer services and support (CSS) division, formed in the aftermath of the profit warning, is being felt in the civil aftermarket, with organic revenue growth of 5.4 per cent versus market growth of 3.5 per cent.