We started coverage of Airbus with a buy recommendation and a price target of €138. We like Airbus for two main reasons. The first is because we like the industry it is in. The world fleet is expected to double of the next 20 years. The second being the attractive valuation of Airbus.
We expect the group to report strong growth in earnings and cash flow in the medium term and we are of the view that this positive outlook is not reflected in its current price.
Airbus manufactures commercial aircraft (74% of sales), Helicopters (9% of sales) and Defence and Space (17% of sales). Of the 74% commercial aircraft, 78% of the sales are for the A320. So it all comes down to the demand of the A320 which is very material for the Group (at the moment the Group has a backlog of 6000+ aircraft A320).
We expect the hurdles faced by the Company in 2018 to diminish in 2019. The Group had supply chain issues when it came to the production of the A320 due to the high demand for the aircraft and the engine manufacturers were not keeping up. However, Airbus is seeing an improvement in its supply chain.
In fact, Airbus delivered 800 commercial units in 2018 and is expected to deliver 880-890 commercial units in 2019. We also expect margin improvement to come as more units are rolled out and the company continues to benefit from economies of scale and higher prices of the aircraft being sold.
Also, Airbus is on track to hit breakeven with the production of the A350. The A350 is the second largest in terms of supply of commercial aircraft after the A320 representing 12% of commercial aircraft sales. We expect Airbus to benefit from the learning curve in 2019. The A350 aircraft was
planned with entry into service scheduled for mid-2017. Management expect improved margins from the A350 in 2019.
In the Helicopter market (9% of sales), Airbus has entered 2019 with a renewed product portfolio and global market presence and in the Defence and Space market (17% of sales) the Group has also repositioned itself to continue to benefit from countries which are increasing their defence budget and need for security which is brought about by increased geopolitical instability.
We like the airline manufacturer because it has a record backlog due to strong demand and we expect margins to continue to improve in the coming years. We do not see a threat due to its high dependence of the A320 given the large backlog the group has and the fact that supply chain issues are being addressed is a positive (also being reflected in the higher expected unit sales for 2019). We also expect positive results from the other segments of the Group.
The fact that Boeing has been under pressure recently due to issues with the 737 Max and the large order made by the Chinese government to purchase 300 jets is an additional bonus.
We believe Airbus offers an attractive risk/reward proposition for shareholders and should form part of a well-diversified portfolio.
Airbus secures multi-billion dollar jet order from China
Airbus has secured an order from China for 300 jets over the past few days, in a deal estimated to be worth tens of billions of dollars. An agreement to purchase A320 and A350 XWB aircraft was signed during a visit by Chinese President Xi Jinping to Paris. The order is part of a package of deals signed during Mr Xi's visit to Europe. It comes as rival Boeing has grounded all of its 737 Max jets after two fatal crashes.
Valuation
Our 12-month Price target of €138 is factoring in a forward Price-to-earnings multiple of 22x and a discount rate of 12%. Our 12-month price target factors in 2019, 2020 and 2021 earnings.
About the Company
Airbus is a European aerospace corporation, registered in the Netherlands and trading shares in France, Germany and Spain. It designs, manufactures and sells civil and military aerospace products worldwide and manufactures in the European Union and various other countries. The company has three divisions: Commercial Aircraft, Defence and Space, and Helicopters, the third being the largest in its industry in terms of revenues and turbine helicopter deliveries.
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.