Analyst Note| Joachim Kotze |
Things remain challenging at narrow-moat Leonardo as they continue to underperform defense peers. Productivity and delivery delays continue to affect the group, which reported a 28% drop in EBITA for the first nine months of 2020, a slight improvement from the 40% decline in the first half. Sales and orders remain flat, with the helicopter division posting solid 41% growth in orders, offset by a decline in the defense and aeronautics order intake. Free cash outflow of EUR 2.6 billion is EUR 1.4 billion lower than the comparative period, driven by delivery delays and a buildup of working capital. Management maintains guidance for full-year EBITA of EUR 925 million and a cash flow-neutral position. Over the medium term group sales will be driven by the delivery of Typhoon fighter jets to Kuwait and a recovery in civil helicopter markets where the group enjoys a leading global position. Our fair value estimate of EUR 11.80 reflects huge upside from the current price, but we highlight that our forecasts come with a high degree of uncertainty due to the lumpy nature of revenue and high operational gearing.