Meggitt

Meggitt PLC (MGGT) is a United Kingdom-headquartered engineering company that offers advanced technologies, products and services. The company operates in 16 countries and focuses on three core sectors, namely aerospace, defence and energy. The differentiated technology and products of the company are underpinned by deep intellectual property, across a wide range of applications. The group’s operations are differentiated in five operating segments: Meggitt Equipment Group, Meggitt Sensing Systems, Meggitt Polymers & Composites, Meggitt Control Systems, and Meggitt Aircraft Braking Systems.

Trading Update
In the first quarter of the financial year 2019, the company reported an organic growth of 9% in revenue, driven by growth in end-markets and increased content on new aircraft platforms. Reflecting strong demand for new generation aircraft, civil aerospace revenue grew by 7% on an organic basis. As a result of strong demand for training systems, brakes and engine composites, defence revenue increased by 18% organically. Reflecting lower demand in the nuclear sector, energy revenue declined by 8% organically.

Financial Highlights (FY 2018, £m)

(Source: Company Filings)

With a growth of 7% in civil aerospace, 10% in defence and 19% in energy, revenue growth of 9% on an organic basis to GBP 2,080.6m reflects strong performance in growing end-market, while reported revenue increased by 4%. Reflecting the growing financial contribution from the key strategic priorities, including a focus on cost-cutting, underlying operating profit increased by 4% to GBP 367.3m, representing a margin of 17.7%, while on a statutory basis, operating profit during the year was GBP 256.6m (2017 restated: GBP 272.7m). Statutory profit before tax was GBP 216.1m (2017 restated: GBP 228.3m) and underlying profit before tax was GBP 334.8m, up from GBP 320.2m in FY 2017. Underlying profit for the year was GBP 264.5m, reflecting underlying earnings per share increased of 34.2p, up by 7% over the year. Statutory profit for the year was GBP 179.0m (2017 restated: GBP 292.8m), while statutory earnings per share declined to 23.2p (2017 restated: 37.8p). Free cash flow decreased by GBP 30m to GBP 167m, and the net cash inflow was GBP 52.5m (2017: inflow of GBP 120.2m). Giving a full year dividend of 16.65p, the company recommended a final dividend of 11.35p.

Valuation Methodology 
Method:  Price/Earnings Approach (NTM)


Share Price Commentary

Daily Chart as at July-12-19, before the market closed (Source: Thomson Reuters)

On 12 July 2019, at the time of writing (before the market closed, GMT 10:30 am), MGGT shares were trading at GBX 542.20, up by 0.07 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 583.80/GBX 410.01. The company’s stock beta was 0.81, reflecting less volatility as compared to the benchmark index. Total outstanding market capitalisation was £4.20 billion, with a dividend yield of 2.97%.

Conclusion
While the company has considered the uneven nature of the demand for defence products and the potential for air traffic growth to moderate, it continues to expect strong revenue growth in 2019. In the recent quarter, the company successfully sold its non-core ignition business in France and deployed its new customer-aligned organisation, making further progress in executing its key strategic initiatives. For FY 2019, it expects to deliver underlying operating margin growth of between 0 to 50 basis points and target 3% to 5% organic growth in group revenue, underpinned by strong shipset content. The company aims at driving sustainable improvements in operational performance and is well positioned to deliver targets for an underlying operating margin of 19.9% by 2021.

Keeping in mind the prospects of the company, and supported by valuation done using the above method, we have given a “BUY” recommendation at the closing price of GBX 541.80 (as on 11 July 2019) with single-digit upside potential, based on 16.33x NTM Price/Earnings (approx.) on FY19E Earnings per share (approx.).

Woodbois

Woodbois Ltd (WBI) is a London-headquartered producer of sustainable African hardwood and hardwood products, with approximately one million acres of natural forest concessions in Gabon and Mozambique. The group produces, processes, manufactures and supplies hardwood and its products into Africa and across the globe, and is also a supplier of diverse, internationally sourced timber and timber products. The AIM-listed company owns manufacturing facilities in both East and West Africa, including a production facility in Gabon and Mozambique. The company’s operations are differentiated in four operating segments, namely trading, forestry, agriculture and head office.

Quarterly Update
In the second quarter of the financial year 2019, the company achieved record group revenue of $4.7m, helping to deliver half-yearly group revenue of $9.2m, against $6.6m in H1 2018. Trading revenue during the quarter rose by 60% to $3.2m, versus s $2m in Q2 2018. The company achieved this growth despite a slower quarter for revenues from its own production, helped by an increase in volumes from existing suppliers.

Financial Highlights (FY 2018, $m)
Driven by 57% growth in trading revenues and 93% growth in Forestry division revenues from its own production assets, revenue grew by 70% in 2018 to $13.4m versus 2017 revenue of $7.9m. The company reported a gross profit of $2.1m versus 2017 gross profit of $453 thousand and 2018 gross profit margin improved dramatically to 15.8%, from 5.7% in 2017. Even though operating costs increased by $3.4m, the pre-tax loss was $5.6m versus 2017 loss of $7.3m. As the company was no longer able to capitalise the positive effect of taxation, the loss for the year was $8m, against a profit of $2.1m in FY 2017. Basic loss per share was 1.76c versus basic earnings per share of 0.74c in FY17.

Share Price Commentary

Daily Chart as at July-12-19, before the market closed (Source: Thomson Reuters)

On 12 July 2019, at the time of writing (before the market closed, GMT 10:30 am), WBI shares were trading at GBX 6.06, down by 1.46 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 8.90/GBX 4.80. The company’s stock beta was 1.37, reflecting more volatility as compared to the benchmark index. Total outstanding market capitalisation was around £28.57 million.

Conclusion
The company works in a highly political unstable countries with a constant threat of regulatory changes. This affects the stability and sustainability of the company’s earnings. Though the company had net cash balances of $1.910 million as at 31 December 2018, it continuously faces the risk of insufficient liquidity and its ability to raise funds. The liquidity of the company’s share is very low, posing another risk for prospective investors. The company’s profitability ratios are considerably lower than the industry margin and its asset turnover ratio, which indicates the optimal utilisation of resources, was 0.06x in 2018, against the industry median of 0.68x.

Based on the above factors, we recommend investors to “AVOID” taking fresh positions at the closing price of GBX 6.15 (as on 11^th July 2019).
 
*The buy recommendation is also valid for the current price as covered in the report (as on July-12-19)
*All forecasted figures and peers have been taken from Thomson Reuters.

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