The positive impact of Senior's self-help measures

In its July trading update, Senior’s (SNR) said that full-year results for 2021 were likely to be slightly ahead of expectations. The aviation and motor parts supplier has reiterated the view that there are “clear signs of recovery in [its] end markets”, but given events of the past 15-months, a degree of caution is still warranted. Indeed, the group cited “well-publicised headwinds associated with freight and commodity costs; semiconductor supply chain challenges for [its] land vehicle customers”. But bosses remain confident of achieving a targeted return-on-capital-employed of 13.5 per cent over the medium-term. (It was neutral in the period under review).

Leaving aside the £24.2m gain on disposal of Senior Aerospace Connecticut, the group still swung to a trading profit of £4.9m against a loss of £126m in HY 2020. The loss was largely the result of an impairment of £110.5m that was recognised in relation to the goodwill allocated to the Aerostructures CGU group. During 2020, several programmes were either cancelled or put on the back-burner because of the pandemic, so Senior was left with excess inventory, leading to impairments as part of the wider restructuring programme.

The programme has been designed to drive cash-flows with an emphasis on tightly managing working capital and capital expenditure outflows. Remedial measures, including further action on inventory levels, together with job losses, have continued into 2021 in the face of changing conditions in some of the Flexonics and Aerospace markets. The restructuring is already having a positive effect, judging by a one-fifth increase in free cashflow to £19.2m, but the group admitted that the second half would be slightly weaker than the first as defence sales contract.

Much rests with the health of global aviation markets, as Senior’s Civil Aerospace division accounts for 36 per cent of group sales. The group notes that the International Air Transport Association has forecast that global air travel passenger numbers will return to 2019 levels by the end of 2022 and will reach 105 per cent of pre-pandemic levels by 2023. Management reckons that demand for parts will be driven by the normal replacement cycle of “older, less efficient, aircraft” and that the long-term catalysts for growth in global passenger air miles remain in place.

Management deserves credit for reacting efficiently to unprecedented challenges on the operational front, particularly regarding inventory levels. But the aviation industry is still hostage to the edicts of global health authorities. The shares are trading at a 14 per cent discount to Jefferies’ new target price of 200p a share. Hold.

Last IC view: Sell, 114p, 08 Mar 2021