Company Reports

MTU Aero Engines, a leading engine component supplier and independent maintenance, repair, and overhaul provider, is well positioned to benefit from the narrow-body aircraft industry's long-term growth outlook. Despite covid-19's impact on short- to medium-term demand, air travel has been resilient with a consistent recovery driven by leisure travel, demand for narrow-body aircraft, and China's reopening.

Wide-moat MTU Aero Engines reported another year of record results and confirmed midterm guidance, although it has cut dividends in the short term to account for the headwinds related to its geared turbofan engines. We maintain our fair value estimate, as we expect that these new GTF issues will have a limited impact on EBIT and cash flow.

Wide-moat MTU Aero Engines confirmed full-year guidance despite headwinds related to new issues with the performance of geared turbofan engines. We maintain our fair value estimate on the back of management's preliminary assessment that these new issues will have a limited impact on EBIT and cash flow, but we have growing concerns about reputational costs affecting future share on Airbus' A320neo.

MTU Aero Engines, a leading engine component supplier and independent maintenance, repair, and overhaul provider, is well positioned to benefit from the narrow-body aircraft industry's long-term growth outlook. Despite COVID-19's impact on short- to medium-term demand, air travel has been resilient with a consistent recovery driven by leisure travel, demand for narrow-body aircraft, and China's reopening.

On Sept. 11, MTU Aero Engines updated guidance related to previously announced engine issues and increased the total number of engines to be repaired. After incorporating the higher figure into our model we are reducing our fair value estimate to EUR 225 from EUR 252 previously. Our wide moat rating is unchanged.

MTU Aero Engines, a leading engine component supplier and independent maintenance, repair, and overhaul provider, is well positioned to benefit from the narrow-body aircraft industry's long-term growth outlook. Despite COVID-19's impact on short- to medium-term demand, air travel has been resilient with a consistent recovery driven by leisure travel, demand for narrow-body aircraft, and China's reopening.

After taking a fresh look at Safran, MTU Aero Engines, and Rolls-Royce, we have confirmed our economic moat ratings but materially increased our fair value estimates to account for a post-COVID-19 air traffic recovery in civil aerospace and pent-up demand in the original equipment segment and aftermarket.

MTU Aero Engines, a leading engine component supplier and independent maintenance, repair, and overhaul provider, is well positioned to benefit from the narrow-body aircraft industry's long-term growth outlook. Despite the COVID-19 impact on short- to medium-term demand, air travel has been resilient with a consistent recovery driven by leisure travel, demand for narrow-body aircraft, and China's reopening.

Wide-moat MTU Aero Engines confirmed full-year guidance despite headwinds related to new issues with the performance of geared turbofan engines. We maintain our fair value estimate on the back of management's preliminary assessment that these new issues will have a limited impact on EBIT and cash flow, but we have growing concerns about reputational costs affecting future share on Airbus' A320neo.

Wide-moat MTU Aero Engines delivered strong first-quarter results with adjusted EBIT of EUR 212 million, up 62% compared with the low base of the previous quarter. Adjusted EBIT margin widened to 13.7%, with a favorable business mix and lower channel costs as the main contributors. The group's revenue of EUR 1.54 billion was up 26% on a like-for-like basis; growth was mainly attributed to higher deliveries of the geared turbofan engine and increased business with industrial gas turbines. The recovery of passenger traffic in China, supported by more relaxed travel policies, helped fuel the revenue growth. However, MTU Aero Engines continues to face supply chain challenges, with an order backlog up 2% from the previous year-end. Despite this, management confirmed its guidance for the full year and recalled that the agreed salary increases will become effective after the second half of 2023. Overall, the company's results were generally in line with our expectations, and as such, we maintain our EUR 210 fair value estimate. At present, the shares appear unattractive.

MTU Aero is a leading aero engine component supplier and independent maintenance, repair, and overhaul, or MRO, provider. With high narrow-body aircraft exposure, it is well-positioned to benefit from the long-term growth outlook of the aerospace industry. Despite short- to medium-term demand pressure as a result of COVID-19, air travel demand is still forecast to grow at 3.5% per year for the next 20 years and it is estimated the industry will require 14,500 new deliveries just to replace the existing fleet by 2040. Narrow-body deliveries will constitute 80% of all new delivered aircraft.

MTU Aero is a leading aero engine component supplier and independent maintenance, repair, and overhaul, or MRO, provider. With high narrow-body aircraft exposure, it is well-positioned to benefit from the long-term growth outlook of the aerospace industry. Despite short- to medium-term demand pressure as a result of COVID-19, air travel demand is still forecast to grow at 3.5% per year for the next 20 years and it is estimated the industry will require 14,500 new deliveries just to replace the existing fleet by 2040. Narrow-body deliveries will constitute 80% of all new delivered aircraft.

Wide-moat MTU Aero Engines raised full-year guidance after lowering it just the previous quarter. The group now expects sales for 2022 to be between EUR 5.4 billion and EUR 5.5 billion (EUR 5.3 billion previously), while EBIT is expected to grow in the low 30% range (mid-20% previously). Foreign-exchange tailwinds and better-than-expected maintenance, repair, and overhaul sales underpin the higher guidance. Group revenue for the first nine months of 2022 increased by 27% and EBIT by 46%. Higher sales of spare parts and MRO activities, as global flight activities resumed, drove the increase, with new engine deliveries still lagging due to supply chain constraints. Looking to 2023, we believe that foreign-exchange tailwinds will most likely disappear, while higher MRO warranty work will put pressure on margins.

On the surface, wide-moat MTU Aero Engines reported strong revenue and EBIT growth, rising by 23% and 53%, respectively. However, this was boosted by a low comparable base and favorable foreign-exchange developments. Nevertheless, the group is well positioned to capitalize on the recovery in demand for new aircraft engines as well as sales of spare parts. Midpoint sales guidance of EUR 5.3 billion for the full year was maintained in euro terms; however, the maintenance, repair, and overhaul business is now only expected to grow in the high-teens percentage range, versus high-20s previously, on an organic U.S. dollar basis due to lower-than-expected geared turbofan engine work. We maintain our EUR 200 fair value estimate and believe shares are trading near fair value territory. We continue to prefer Safran, which has more upside.

Wide-moat MTU Aero’s first-quarter 2022 results are in line with expectations. Sales and EBIT growth of 19% and 52% respectively, reflect the recovery in air traffic and low comparable base in the prior year. The standout performers were the maintenance, repair, and overhaul, or MRO, and military businesses, both posting sales growth higher than 20%. Management reiterated 2022 midpoint sales of EUR 5.3 billion and EBIT growth in the mid-20s. We maintain our EUR 200 fair value estimate, with shares trading in fair value territory.

In light of supply chain bottlenecks and potential raw material shortages, which have intensified as a result of the war in Ukraine, we reassess our forecasts for wide-moat Safran, wide-moat MTU Aero and narrow-moat Rolls-Royce. After making short-term downward adjustments for sales growth and profitability the fair values of the firms in question do not change significantly. This is due to the long-term nature of their respective sales cycles, with the bulk of the value captured in later years. Safran’s fair value estimate remains unchanged at EUR 150 per share, while MTU Aero’s is lowered to EUR 200 per share from EUR 212, and Rolls-Royce’s fair value estimate is now GBX 105 (ADR: $ 1.40) compared with GBX 115 (ADR: $1.60), previously. We continue to prefer Safran, which trades at a hefty discount to our fair value estimate, while Rolls-Royce and MTU Aero are trading near fair value territory.

MTU Aero is a leading aero engine component supplier and independent maintenance, repair, and overhaul, or MRO, provider. With high narrow-body aircraft exposure, it is well-positioned to benefit from the long-term growth outlook of the aerospace industry. Despite short- to medium-term demand pressure as a result of COVID-19, air travel demand is still forecast to grow at 3.5% per year for the next 20 years and it is estimated the industry will require 14,500 new deliveries just to replace the existing fleet by 2040. Narrow-body deliveries will constitute 80% of all new delivered aircraft.

Germany’s boost in defense spending, announced Feb. 27, will benefit most European defense contractors and could lead to multiyear increases in the growth outlook for these companies. While it is early days and very difficult to quantify the exact impact, we expect to make positive adjustments to our defense coverage. Of the pure-play defense names, narrow-moat Thales, Dassault, and Leonardo trade at discounts to our fair value estimates while wide-moat BAE Systems trades at a premium. We don’t believe our revisions will change this ranking by much, and our preference is for Thales and Dassault. Despite the impact from a demand and cost perspective on the airline and commercial aerospace companies we cover, we don’t foresee any structural long-term changes to their prospects and as such don’t anticipate any major changes to our fair value estimates. We maintain our preference for wide-moat Safran and no-moat Wizz Air under our aerospace and airline coverage, respectively.

Wide-moat MTU Aero reported full-year 2021 EBIT and cash flow in line with expectations despite softer-than-expected revenue growth. Below guidance revenue growth of 5% to EUR 4.2 billion was affected by weaker-than-expected trading and currency headwinds. Strong EBIT and free cash flow growth were underpinned by a positive mix shift to higher-margin spare part sales and cost cutting. Group EBIT of EUR 468 million grew by 13%, with margins expanding by 80 basis point to 11.2% compared with the previous year. Free cash flow more than doubled to EUR 240 million, which aided the 14% reduction of net debt to EUR 673 million at year-end. Management maintained midpoint revenue guidance of EUR 5.3 billion and approximately 25% EBIT growth for 2022. We expect to slightly lower our EUR 212 fair value estimate once we update our forecasts as the high share of low-margin Geared Turbofan, or GTF, maintenance affects the maintenance segment’s margin.

Wide-moat MTU Aero Engines raised its full-year free cash flow guidance to a high-double-digit conversion, from mid- to high double digits previously, as free cash flow growth of 41% to EUR 205 million tracks ahead of expectations. The top end of previous revenue guidance of EUR 4.3 billion to EUR 4.5 billion was lowered to EUR 4.4 billion, as maintenance, repair and overhaul work came in lower than expected, while EBIT margin guidance was raised to the top end of the prior 10% to 10.5% range, which compares with an EBIT margin of 16.4% in precoronavirus 2019.