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Technology Stocks

No Meaningful Surprises in ITT’s First-Quarter Print as We Maintain FVE; Shares Cheap

Business Strategy & Outlook

As per the predication the positive outlook for ITT on its best-performing segment, motion technologies, or MT. MT traditionally outpaces market growth by 700 to 1,000 basis points, a trend expect to continue. And while industrial process, or IP, remains a price-competitive business, management should be commended for improving its adjusted segment operating margins to the midteens, despite a very difficult operating environment. Both IP and ITT’s connect and control technologies segment, or CCT, should increasingly create shareholder value as management furthers lean improvements.

Within MT, the most bullish on brake pads, which still present a robust growth opportunity in the medium-term. Their potentially positive impact on intrinsic value, given MT’s sales exposure. The positive MT growth drivers include a strong secular trend away from copper and other metal brakes, market preference for smoother, noise-damping brakes, and demand for increased safety leading to additional adoption of ceramics. These dynamics play to ITT’s strength in material science development. Rising installations of disc brakes, which demonstrate superior braking efficiency, are another tailwind. These forces will drive aftermarket growth, particularly as vehicle production rates increase throughout the explicit forecast. Innovations like the smart pad have the potential to directly interface with a vehicle’s control unit and provide drivers a wealth of data, including enhanced diagnostics of noise and vibration, real-time braking torque and pressure data, and sensor readings during adverse weather patterns. And MT’s wealth of competitive advantages positions it strongly in the transition toward electric vehicles on the original equipment side, even as the aftermarket will be a slow, but long-term headwind on the aftermarket side.

Finally, aerospace and defense constitute about 47% of CCT’s sales mix. While defense is tied to elevated defense budgets in the near term, ITT is well positioned in the commercial aerospace
recovery. Even with near-term challenges, the both IP and CCT can raise its adjusted operating margins to between 19% and 20% over the long term.

Financial Strengths

ITT is on solid financial footing and the firm a moderate credit risk rating. The following a transaction on June 30, 2021, ITT no longer has any obligation with respect to pending and future asbestos claims. The ringfencing this liability was an excellent move on the part of management, since it removed both uncertainty and headline risk.

Using a punitive methodology (incorporating all interest-bearing obligations and calls on capital), ITT
consistently runs a net cash positive position. Therefore, no one is overly concerned about whether ITT can service its current obligations.

Bulls Say

Solutions like copper-free and smart brake pads will help ITT win content on additional and existing platforms, and its material science expertise should help with wins in the electrical vehicle original equipment segment.

CEO Luca Savi will bring the same focus and drive operational efficiency to both IP and CCT as he did in MT; long-term, both IP and CCT can deliver 20% segment operating margins.

An unleveraged balance sheet gives the company room to make value-accretive acquisitions.

Company Description

ITT is a diversified industrial conglomerate with nearly $3 billion in sales. After the spinoffs of Xylem and Exelis in 2011, the company’s products primarily include brake pads, shock absorbers, pumps, valves, connectors, and switches. Its customers include original-equipment and Tier 1 manufacturers as well as aftermarket customers. ITT uses a network of approximately 700 independent distributors, which accounts for about one third of overall revenue. Nearly three fourths of the company’s sales are made in North America and Europe. ITT’s primary end markets include automotive, rail, oil and gas, aerospace and defense, chemical, mining, and general industrial.

(Source: Morningstar)
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Small Cap

BLD on a pro forma basis is expected to have net debt of less than $400m

Investment Thesis

  • Near-term outlook remains uncertain in Australia with higher costs and supply chain constraints.
  • BLD is a much cleaner business operations following several divestments, which increased focus. 
  • Boral is expected to benefit from proposed infrastructure projects.   
  • Better realization of price increases, whilst volumes remain solid. 
  • Focused on the Australian market. 
  • Proceeds from divestments could be returned to shareholders. 
  • Large cornerstone shareholder – Seven Group Holdings (owns approx. 70%) – may provide shareholder turnover stability

Key Risks

  • Increase Concentrated earnings, focused on just the Australian Construction market. 
  • Indirect and direct effect of coronavirus on operations.
  • Potential delays to infrastructure assets leading to a volume gap in the market. 
  • Cost pressures continue to exceed price increases. 
  • Unfavorable weather impacts. 
  • BLD is now majority owned by Seven Group Holdings (approximately 70% of outstanding shares) which means minority shareholders’ interest may not always be a priority when making key strategic decisions around capital structure, shareholder returns and strategic initiatives

Key Highlights

BLD’s 1H22 results were impacted by Covid-19 related construction shutdowns and adverse wet weather. 1H22 revenue from continuing operations of $1.5bn was up +1% YoY driven by activity in detached house, A&A and RHS&B. However, operating earnings of $78m declined -23% YoY, with EBIT margin declining -100bps to 5.8%, due to $33m impact from Covid-19 lockdowns and expenses (energy + other costs). $22m from the cost out program (Transformation program) provided some offset. Maintain Neutral recommendation given the stock trades on a healthy forward PE-multiple of 24x, which we believe adequately reflects BLD’s leverage to the Australian infrastructure spend, further capital returns potential and cost outs supporting earnings (Transformation program). Further, BLD is now majority owned by Seven Group Holdings (approximately 70% of outstanding shares) which means minority shareholders’ interest may not always be a priority when making key strategic decisions around capital structure, shareholder returns and strategic initiatives.  

  • 1H22 results summary – continuing operations. (1) Revenue of $1.5bn was up +1% (or up +3% on a comparable basis), driven by activity in detached house, A&A (alterations & additions) and RHS&B (roads, highways, subdivisions & bridges) and despite there being disruptions from lockdowns. The Company did see solid volumes in concrete (up +1%) and quarries (up +4%). Further, management noted that concrete like-for-like prices were steady and up +2% in quarries. (2) Operating earnings (EBIT) of $78m were down -23% (with EBIT margin declining to 5.8% from 6.8%), which was largely driven by the impact from Covid-19 related construction shutdowns (which adversely impacted earnings by $33m) and expenses (energy + other costs). Partially providing some buffer to EBIT was higher volume (up $22m) and $22m from the cost out program (Transformation program), which includes the $24m of cost inflation. (3) Operating cash flow from operations of $86m was down -22%, reflecting lower EBITDA performance due to construction shutdowns
  • Capital return of $2.72 per share. Given the completion of disposal of BLD’s North American Building Products and Fly Ash, and Australian Building Products businesses (Timber and Roofing & Masonry) for more than $4bn, the Company will return $3bn surplus capital to shareholders via a $2.65 capital reduction and 7cps unfranked dividend.
  • Capital structure. Following the divestments of its non-core assets and expected capital return to shareholders, BLD on a pro forma basis is expected to have net debt of less than $400m. Management is targeting net debt of $900m to $1.1bn (including leases) and leverage (net debt / EBITDA) of 2 – 2.5x.
  • FY22 outlook comments. Management did not provide overly specific guidance but noted the following: (1) 2H22 revenue is expected to be above 1H22, driven by out-of-cycle national price increases effective Jan/Feb 2022. However, this is expected to offset the impact of higher energy costs, which will remain a headwind in 2H22. (2) No construction shutdowns in 2H22 ($33m impact in 1H22) are expected to be offset by typical 2H seasonality due to 6 fewer trading days.   

Company Profile 

Boral Ltd (BLD) is the largest integrated construction materials company in Australia, producing and selling a broad range of construction materials including quarry products, cement, concrete, asphalt and recycled materials. The Company has a portfolio of assets consisting of upstream and downstream assets. BLD employs approximately 10,300 employees and contractors and has 367 construction materials sites across Australia.

 (Source: BanyanTree)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Small Cap

The company’s platform reach should grow as Sabre continues to revitalize its technology

Business Strategy and Outlook

Despite material near-term travel demand headwinds driven by the coronavirus, it is anticipated Sabre to maintain its position in global distribution systems over the next several years, driven by a leading network of airline content and travel agency customers as well as its solid position in technology solutions for these carriers and agents. Sabre’s roughly 40% GDS transaction share is the second-largest of the three companies (behind narrow-moat Amadeus and ahead of privately held Travelport) that together control nearly 100% of market volume. Sabre is also a leader in providing technology solutions to travel suppliers. 

Sabre’s GDS enjoys a network advantage, which is the source of its narrow-moat rating. As more supplier content (predominantly airline content) is added, more travel agents use the platform, and as more travel agents use the platform, suppliers offer more content. This network advantage is solidified by technology that integrates GDS content with back-office operations of agents and IT solutions of suppliers, leading to more accurate information that is also easier to book. Also, the company’s platform reach should grow as Sabre continues to revitalize its technology and looks to expand with low-cost carriers and in countries where it previously had only minimal penetration, which are also markets with higher yields than the consolidated North American region. 

Replicating the company’s GDS platform would entail aggregating and connecting content from several hundred airlines to a platform that is also connected to travel agents, which requires significant costs and time. Although it is seen for GDS aggregation, processing, and back-office advantages as substantial, technology architectures like that of eTraveli (set to be acquired by narrow-moat Booking Holdings in early 2022), enable end users to access not only GDS content but supply from competing platforms, which could take some volume from companies like Sabre. Also, GDS faces some risk of larger carriers making direct connections with larger agencies, although it is likely for these relationships to be the exception rather than the rule and for Sabre to still be the aggregating platform in either case.

Financial Strength

Although Sabre’s balance sheet is leveraged, it has shored up its liquidity profile and has enough runway to operate at zero revenue into 2023. Sabre has achieved this profile by eliminating $275 million in costs, tapping its $400 million revolver, raising debt and equity, and selling its AirCentre business for $393 million (closed in the first quarter of 2022) Sabre’s financial health was tested in 2020, as lower demand from COVID-19 and higher incremental investment into new markets and the cloud, caused its near-term net debt/adjusted EBITDA to breach covenants (which are currently suspended given the material impact of COVID-19). While Sabre’s net debt/adjusted EBITDA ended 2019 at 3.1 times, it turned negative in 2020 and 2021, it is anticipated the ratio will improve to 6.7 times in 2023. Sabre is seen reaching this leverage ratio despite temporarily halting dividends and repurchases in 2020 and through 2023, cutting costs, and extending near-term debt maturities out three years, resulting in no material debt due until 2024, when $1.8 billion is scheduled to mature. Also, it is held Sabre’s strong competitive positioning and free cash flow generation during more normal environments will afford it flexibility to work with banking partners in the near term. It is alleged Sabre to payout 45%-50% of its earnings in dividends in 2024-31, after temporarily suspending dividends in early 2020. EBIT/interest coverage was 2.3 times in 2019 and is expected to surpass that level by 2024. It is forecasted free cash flow generation of $1.5 billion during 2022-26.

Bulls Say’s

  • The company’s GDS network hosts content from all airlines and is used by many travel agents, resulting in a large industry share. Replicating the GDS network involves meaningful time and costs. 
  • The network advantage is supported by Sabre’s platform revitalization to next-generation cloud technology, which drives innovation, reliability, and cost efficiencies. 
  • The business model is predominantly driven by transaction volume and not pricing, leading to less cyclical volatility.

Company Profile 

Sabre holds the number-two share of global distribution system air bookings (40.9% as of the end of 2020 versus 38.8% in 2019; 2021 booking share was not provided). The travel solutions segment represented 89% of total 2021 revenue, split between distribution (two thirds of segment sales) and airline IT solutions (one third) revenue. The company also has a growing hotel IT solutions division (11% of revenue). Transaction fees, which are mostly tied to volume and not price, account for the bulk of sales and profits 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do, business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and is not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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FVEs Raised for Miners on Higher Commodity Prices Driven by Economic Recovery and Supply Constraints

Business Strategy & Outlook:  

Newcrest has no moat despite a history of low-cost production and long mine life. Returns have improved post the expensive acquisition of Lihir, but are likely to remain below the company’s cost of capital for the foreseeable future. Newcrest accounts for less than 3% of global mine production and is a price taker. Gold is increasingly the plaything of investors and subject to swings in sentiment. In 2001, gold consumption for jewelry and technology accounted for 91% of global demand, but in 2020 this had fallen to 38% as a result of increased investor demand and weaker gold consumption. There is also uncertainty around exploration success and the cost to buy or develop new mines, which are an important part of Newcrest’s future value. Operations are focused on the Asia-Pacific region, with production split roughly evenly between Australia and Papua New Guinea, or PNG, with a smaller contribution from the Americas. The company is a long-established low-cost producer, save a cost spike in 2013, which subsequently abated. Current management was installed in 2014 and brought a focus on cost efficiency, capital discipline and optimisation. Under Sandeep Biswas, Newcrest has been a much more reliable producer and has delivered incremental improvements at its operations, boosting throughput and lowering unit costs, particularly at Lihir and Cadia. Copper is a secondary product, contributing approximately 15% of revenue in fiscal 2019, but it is likely to rise over time. It represents approximately 40% of the in-ground value of Newcrest’s reserves and resources. Newcrest has a solid exploration record. Excluding acquired Lihir ounces, gold equivalent reserves increased from 3.4 million ounces in 1992 to 78 million ounces in December 2017, while resources increased from 8.5 million ounces to 144 million ounces. Gold equivalent resources were added at less than AUD 20 per ounce. Reserves at the end of 2020 were 49 million ounces of gold and 6.8 million metric tons of copper.

Financial Strengths: 

The company’s balance sheet is sound. The company ended June 2021 with modest net cash of USD 0.2 billion. The net debt to grow to end fiscal 2022 to about USD 1.5 billion with the acquisition of Pretium Resources and elevated capital expenditure at Cadia, Lihir and with the development of Havieron and Red Chris. However, despite the increase, the balance sheet is still sound. The forecasted debt/EBITDA to peak slightly to around 0.7 in fiscal 2022 before declining gradually through the forecasted period. Newcrest has long-dated corporate bonds totaling USD 1.65 billion. The bonds mature in fiscal2030, 2042, and 2050 with maturities of USD 650 million, USD 500 million, and USD 500 million, respectively. At the end of fiscal 2021, the company had USD 1.8 billion of cash and USD 1.6 billion of undrawn debt.

Bulls Say: 

  • Gold companies can behave countercyclically. They provide a hedge to inflation risk and tend to offer some benefit in times of market uncertainty. Gold can gain from continued money printing and/or if there is a flight to safety.
  • Newcrest’s reserves are massive and mine life is long, offering leverage to upwards movements in the gold price.
  • Newcrest owns several world-scale deposits in Cadia, Telfer, Lihir, and Wafi-Golpu. Large deposits typically bring significant exploration upside and expansion options.

Company Description:

Newcrest is an Australia-based gold and, to a lesser extent, copper miner. Operations are predominantly in Australia and Papua New Guinea, with a smaller mine in Canada. Cash costs are below the industry average, underpinned by improvements at Lihir and Cadia. Newcrest is one of the larger global gold producers but accounts for less than 3% of total supply. Gold mining is relatively fragmented.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

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Shares Small Cap

It is going to be challenging for Spirit to expand content on existing aircraft platforms organically

Business Strategy and Outlook

Spirit AeroSystems is the largest independent aerostructures manufacturer. The firm produces fuselages, wing structures, and structures that house and connect engines to aircraft. Spirit’s revenue has traditionally been almost entirely connected to the original production of commercial aircraft, but Spirit has a growing defense segment and recently acquired Bombardier’s maintenance, repair, and overhaul business. As commercial aerospace manufacturing is highly consolidated, it is unsurprising that Spirit has customer concentration. Historically, 80% of the company’s sales have been to Boeing and 15% have been to Airbus. Management targets a 40% commercial aerospace, 40% defense, and 20% commercial aftermarket revenue exposure. The firm acquired Fiber Materials, a specialty composite manufacturer focused on defense end markets, and Bombardier’s aftermarket business in 2020 to diversify revenue. It is likely Spirit will need significant additional inorganic growth to achieve its goals. 

Spirit AeroSystems was spun out of Boeing in 2005 and the company remains the sole-source supplier for the majority of the airframe content on the 737 and 787 programs. Spirit is particularly exposed to Boeing’s 737 program, which generally accounts for roughly half of the company’s revenue. Boeing retained all of the intellectual property when it spun out the company. It is alleged that the lack of intellectual property and these long-term supply agreements prevent Spirit from fully monetizing its sole-source supplier position. 

Spirit became an Airbus supplier in 2006 with the acquisition of BAE Aerostructures and has inorganically expanded content on Airbus products in recent years. It’s held in positivity: Spirit’s revenue diversification because it reduces the firm’s product concentration risk. It is probable that the firm will hold off from inorganic growth, as Spirit has taken substantial debt to fund unprofitable operations during the COVID-19 pandemic and will have few capital allocation options other than deleveraging during an aerospace recovery. It is believed that it will be challenging for Spirit to expand content on existing aircraft platforms organically.

Financial Strength

Spirit AeroSystems has raised and maintained a considerable amount of debt since the grounding of the 737 MAX began in 2019. The company had $1.5 billion of cash on the balance sheet and about $3.8 billion of debt at the end of 2021, and access to another $950 million of debt if it so needs. It is held roughly slightly below breakeven cash flow in 2022, and that the firm will be able to meet its goal of removing $1 billion of debt off its balance sheet in the three-year period leading to 2023. It is projected that Spirit will focus on deleveraging post-pandemic. The firm has $300 million debt coming due in 2021 and 2023, as well as $1.7 billion of debt coming due in 2025, and $700 million of debt coming due in 2028. Based on projections, it is regarded that the firm will be able to cover the debt maturities in cash, but it is likely the 2025 obligations will be the most difficult for the firm to cover. It is alleged that managing the debt maturity schedule will be the paramount issue Spirit faces in an aerospace recovery, and that shareholder remuneration will likely be a secondary focus for the firm.

Bulls Say’s

  • Commercial aerospace manufacturing has a highly visible revenue runway, despite COVID-19, from increasing flights per capita as the emerging market middle class grows wealthier. 
  • Spirit has restructured to become more efficient when aircraft manufacturing recovers. 
  • Spirit is diversifying its customer base, which is likely to make it less susceptible to customer specific risk.

Company Profile 

Spirit AeroSystems designs and manufactures aerostructures, particularly fuselages, for commercial and military aircraft. The company was spun out of Boeing in 2005, and the firm is the largest independent supplier of aerostructures. Boeing and Airbus are the firms and its primary customers, Boeing composes roughly 80% of annual revenue and Airbus composes roughly 15% of revenue. The company is highly exposed to Boeing’s 737 program, which generally accounts for about half of the company’s revenue. 

(Source: MorningStar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

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