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Meggitt faces battle to rein in costs

The engineer's order intake suggests progress at the half-year mark, although cost pressures remain in evidence
August 7, 2018

Meggitt’s (MGGT) transformation from a holding company into a leaner, more customer-focused business appears to winning over the engineer’s client base. Strip out the impact of asset sales and currency movements, and strong demand for civil aerospace, military and energy sector parts triggered a 9 per cent rise in revenues and an impressive 24 per cent surge in order intake in its first half.

IC TIP: Hold at 553p

The next challenge Meggitt faces is converting top-line growth into profits. As previously flagged, the engineer incurred extra costs getting some of its previously acquired businesses up to speed – and capable of tackling higher volumes. The upshot was a 7 per cent fall in underlying operating profit to £151m.

The group’s polymers and composites segment was mainly to blame for this unsavoury performance. The division was forced to hire and train new staff to meet demand for retrofit fuel tanks for Boeing’s F/A-18 and work closer with customers because, in the words of Meggitt’s chief Tony Wood, “composites are complicated”. Extra costs prompted management to guide for margins at the lower end of its targeted 17.7 per cent to 18 per cent range.

Bank of America Merrill Lynch forecasts adjusted EPS of 33.7p for the full year, rising to 36.8p in 2019.

MEGGITT (MGGT)   
ORD PRICE:553pMARKET VALUE:£4.29bn
TOUCH:553-554p12-MONTH HIGH:577pLOW: 416p
DIVIDEND YIELD:2.9%PE RATIO:15
NET ASSET VALUE:307p*NET DEBT:47%
Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
2017**96517219.65.05
201895210511.75.30
% change-1-39-40+5
Ex-div:06 Sep   
Payment:28 Sep   
*Includes intangible assets of £2.6bn, or 337p a share **Restated for IFRS 15