Airbus — Reducing turbulence as year progresses

Airbus — Reducing turbulence as year progresses

Airbus has maintained guidance for FY17, although the recurring issues on the A380, A400M, A350 and A320neo programmes remain a focus of discussion. A stronger second half implied by the guidance should allay some of the concerns, and provide trading momentum into next year. Cash flow appears to be broadly on track which, combined with a resumption of EPS growth in FY18, remains the main support for the investment case.

Airbus

Reducing turbulence as year progresses

Aerospace & defence

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28 July 2017

Price

€72.27

Market cap

€56bn

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Share details

Code

AIR

Listing

Euronext

Shares in issue

772.7m

Business description

Airbus is the European manufacturer of large civil passenger jets, which competes directly with Boeing of the US. The group also produces and supports helicopters, space equipment, military aircraft and other defence equipment.

Bull

Huge civil aircraft backlog representing over 10 years (at 2016 delivery levels).

Production rates should now start to rise from the recent plateau as neo transitions develop and A350 ramp-up kicks in.

Cash dynamic has been better than expected and cash conversion should improve as the new product investment phase in Civil wanes.

Bear

Continuing issues in military aircraft with A400M performance problems and lower Typhoon production.

Despite the stronger space margin, returns in defence remain subdued.

A380 production cuts raise concerns over programme longevity and costs.

Analysts

Andy Chambers

+44 (0)20 3681 2525

Annabel Hewson

+44 (0)20 3077 5700

Airbus is a client of Edison Investment Research Limited

Airbus has maintained guidance for FY17, although the recurring issues on the A380, A400M, A350 and A320neo programmes remain a focus of discussion. A stronger second half implied by the guidance should allay some of the concerns, and provide trading momentum into next year. Cash flow appears to be broadly on track which, combined with a resumption of EPS growth in FY18, remains the main support for the investment case.

Programme issues constrain first half

H117 results showed stable sales, but a step backward in reported EBITDA in all three divisions, although €939m in Q2 (FY16: €1,181m) was ahead of consensus. In Commercial Aircraft profits fell 25%, reflecting delivery mix and phasing, as well as the transition pricing to new models. The engine issues continued to constrain A320neo production and deliveries. The A350 ramp-up is progressing more positively, although the recent cancellation of four aircraft by Qatar Airways is unhelpful. The reduction of A380 output to eight per annum also requires rigorous management of costs. In ADS the 23% decline in adjusted EBIT was largely due to M&A activity, with underlying performance broadly maintained. Resolution of the ongoing A400M issues is still being discussed with customers and, with export orders yet to materialise, the production rate is also being monitored. Typhoon production has fallen as further export orders remain elusive, although support should continue for decades. A commitment to the next Franco-German generation fighter is encouraging. Stronger sales and deliveries in Helicopters only partly offset adverse delivery mix and lower flying hours on service contracts, so profits fell by a lower than expected 36% due to an improved Q2.

Stronger momentum implied from H217

The maintenance of FY17 guidance implies greatly improved H2 deliveries, earnings and cash flow. In turn, this suggests many of the constraints on H117 are being removed, especially in Commercial Aircraft. Allowing for recent disposals, a FCF of c €1.25bn before M&A and customer financing is anticipated despite the burden of the >€1bn outflow relating to the A400M, which persists through 2018. We still expect an improvement in FY18 to gather pace in FY19.

Valuation: Growth should accelerate

While FY17 is heavily skewed to the second half, guidance of mid-single digit growth in adjusted EBIT and adjusted EPS is reflected in consensus estimates, allowing for the M&A perimeter changes. However, earnings growth should accelerate In FY18 as the current issues are overcome.

Consensus estimates

Year
end

Revenue
(€bn)

EBIT*
(€bn)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

64.5

4.11

3.39

1.30

21.3

1.8

12/16

66.6

3.96

3.31

1.35

21.8

1.9

12/17e

67.8

4.11

3.34

1.47

21.6

2.0

12/18e

73.3

5.27

4.47

1.81

16.1

2.5

Source: Bloomberg consensus. Note: *Historic figures are EBIT adjusted as per Airbus’s calculation.

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Airbus and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Disclaimer

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Airbus and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison's solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are "wholesale clients" for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document.
A marketing communication under FCA rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a "personalised service" and, to the extent that it contains any financial advice, is intended only as a "class service" provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited ("FTSE") (c) FTSE [2017]. "FTSE(r)" is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE's express written consent. The research analyst primarily responsible for the preparation of this report personally holds an equity position in the company of less than 1%.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

JPMorgan Global Convertibles Income Fund — Steady NAV progression and a 4.5% yield

JPMorgan Global Convertibles Income Fund (JGCI) is the only UK-listed closed-end fund specialising in convertible bonds, aiming to generate income along with the possibility of capital growth. Increased investment flexibility granted to the managers in late 2015 means the fund can now invest more in the balanced to equity-like segments of the convertible bond market. NAV performance since launch in 2013 has been fairly steady, in spite of an environment of falling yields and tighter spreads on high-yield bonds. However, share price performance has been volatile at times, so the board has introduced a new discount control policy and has stepped up the pace of share buybacks. There has been a recovery in the share price since the policy was put in place in May 2017, yet JGCI still offers an attractive yield of 4.5%.

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