Meggitt Plc

Meggitt Plc (LON: MGGT) is an Aerospace and Defense company which provides components, sub-systems and advanced technological solutions for defence, aerospace and energy applications.

On 10 November 2020, the Company will announce the trading update.

Rationale for Valuation – Buy at GBX 265.10

• On the liquidity front, the current ratio was 1.45x in H1 FY20, which was higher than the industry median. This reflects that the Company has sufficient current assets to pay short-term obligations.
• Despite the tough market condition, the Company expects defence business to deliver decent growth in FY20 with robust demand and decent order flow.
• From the technical standpoint, 90-day RSI stood at 45.64, which is supporting the upside movement.

Key Risks

• COVID-19 is causing substantial disruptions to the respective supply chains and the end markets, while the customer demand is shrinking as activity levels have reduced.
• The Company is exposed to a number of market risks, some of which are of a macro-economic in nature such as, fluctuations in foreign currencies, oil prices, and interest rates.
• The overall business of the Company could be affected by a change in regulations and government policies.

Financial Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 8 September 2020)

(Source: Company Website)

• The Company delivered a decent performance, with revenue slightly ahead of the guidance (which was given on 2 July 2020).
• Meggitt witnessed a robust liquidity position, with headroom of £856 million on committed facilities and net debt of £1,000 million (including adverse foreign exchange movement of £65 million).
• It has strong progress on actions to reduce cost, protect cash and resize the Group.
• The Company has shown an initial sign of recovery, with an active fleet recovered to 67% at the end of July 2020. It also showed a progressive recovery in air traffic.

One Year Share Price Chart

 (Source: Kalkine Group, Refinitiv)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The first-half performance of the Company stood in line with the expectations. The Company expects the market recovery in the civil aerospace sector as commercial airlines bringing more fleet back into service. MGGT expects neutral cash flow in FY20. However, the first half of 2020 performance was impacted by the continuing effects of COVID-19 in the civil aerospace business, due to the unprecedented reduction in global air traffic activity.

In the defence business, the Company continued to perform strongly and represented 43% of the Group's revenue in H1 FY20. The Company believes risk and uncertainty will remain in H2 FY20, and duration of the pandemic will impact the pace of recovery. Overall, MGGT seems to be well-positioned to benefit from the recovery and to continue the transformation of the Company to deliver long-term, profitable growth. The stock made a 52-week low and high of GBX 196.15 and GBX 701.80, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Meggitt at the closing market price of GBX 265.10 (as on 1 October 2020), with lower double-digit upside potential based on 16.04x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.). 

*The Buy recommendation is also valid for the current price as covered in the report as on 2 October 2020.

*All forecasted figures and Peer/Industry Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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