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Meggitt flies into the red amid pandemic storm

Resilience in the group's defence business was unable to offset the downturn in civil aerospace
September 8, 2020

As trading figures from Melrose (MRO) and Rolls-Royce (RR.) have already demonstrated, the collapse in global air travel due to Covid-19 has reverberated down the entire civil aerospace supply chain. As demand for new aircraft weakened and plane makers cut production rates, engineering group Meggitt (MGGT) saw revenue from civil aerospace plunge by more than a quarter in the six months to 30 June, to £432m. This more than offset the 4 per cent increase in revenue from its defence activities.

IC TIP: Hold at 282p

More than half the group’s civil aerospace revenue comes from its aftermarket business, which provides ‘maintenance, repair and overhaul’ (MRO) services and spare parts. As customers deferred orders, aftermarket sales dropped by a quarter. Since these are higher margin activities, this contributed to Meggitt’s overall underlying operating margin contracting by 3.9 percentage points to 11.1 per cent. Underlying operating profit therefore dropped by more than a third to £102m.

On a statutory basis, the group swung to a £349m operating loss – versus a £91m profit a year earlier – weighed down by more than £400m of exceptional costs. These include £373m of impairment losses and asset write-downs reflecting the uncertain aerospace outlook, and £13m of Covid-19-related expenses.

While the group did secure new contracts during the first half, these were largely defence related. Overall orders dropped by more than a quarter to £882m, with the book-to-bill ratio – the ratio of orders received to those invoiced – coming in at 0.9. In response to the new civil aerospace environment, Meggitt is resizing its business having cut almost a fifth of its global workforce. It is aiming to deliver £400m-£450m of cash savings this year.  

Net debt has climbed by a tenth from the December year-end position to £1bn. Equivalent to 1.8 times cash profits, this is well within the group’s covenant multiple of 3.5. Due to increased capital expenditure and higher working capital, Meggitt saw a £122m free cash outflow in the first half which was partially offset by the £110m sale of its Training Systems business. The group is hoping to be free cash flow neutral for the full year by reducing its inventory. Shifting its stock is taking longer than expected as customers work through their own reserves first. The 2019 final dividend was cancelled in March and now there is no interim payout either.

The consensus forecast places full year underlying operating profit of £215m – down from £403m in 2019 – rising to £274m in 2021.

MEGGITT (MGGT)    
ORD PRICE:282pMARKET VALUE:£ 2.19bn
TOUCH:286-288p12-MONTH HIGH:702pLOW: 196p
DIVIDEND YIELD:NILPE RATIO:NA
NET ASSET VALUE:279p*NET DEBT:46%
Half-year to 30 JunTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20191.0772.67.35.55
20200.92-368-44.3nil
% change-14---
Ex-div:na   
Payment:na   
*Includes £2.1bn in intangible assets or 276p a share