14.11.2017

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FACC confirmed at HOLD, TP EUR 15.00 - Big steps towards sustainable operating turnaround 

2Q 17/18 marked the fourth quarter in a row in which FACC was able to report visibly higher profitability and hence operating earnings.
We hence considerably increase our earnings expectations for FY 17-19e (partially supported by provision releases) bringing the benefits of the operating turnaround of the Engines & Nacelles and Interiors divisions forward by 1-2 years.
As a consequence of the improved earnings outlook, we hike our TP to EUR 15.00 vs. EUR 10.25 previously but reiterate our HOLD recommendation. The new target price offers only limited remaining upside following the excellent share price performance.
In a bull case expecting FACC to deliver near its upper end operating margin target of 10% implying operating profit of roughly EUR 100 mn (vs. RCB est. EUR 81 mn) in FY 20/21e we calculate a fair value of approx. EUR 20 per share.

The last reported quarter (2Q 17/18) marked the fourth quarter in a row in which FACC was able to report visibly higher profitability and hence operating earnings. In the last four quarters clean operating profit averaged EUR 13 mn vs. only approx. EUR 3 mn on average in the six quarters before. We conclude that the company made a very big step forward in the last 12 months having successfully turned around operations and significantly reduced losses in two of the three divisions (Engines & Nacelles and Interiors). We hence considerably increase our earnings expectations for FY 17-19e (partially supported by provision releases) bringing the benefits of the operating turnaround of the Engines & Nacelles and Interiors divisions forward by 1-2 years.

Reiteration of HOLD, TP hike to EUR 15.00: As a consequence of the improved earnings outlook, we hike our TP to EUR 15.00 vs. EUR 10.25 previously but reiterate our HOLD recommendation. The new target price offers only limited remaining upside following the excellent share price performance (+180% ytd, +40% -3m ). We conclude that a visible further earnings improvement seems to be priced in.

We hike our estimates about to the company's long term goal indicated at the IPO in 2012: Our estimates fit with the rather ambitious longer-term goal of the company targeting EUR 1 bn in revenues in FY 20/21e (RCB est. EUR 973 mn, nearly a doubling of organic group revenues within six years), envisaging an operating profit margin of 8-10% (RCB est. roughly 8.5%). However, the targets look more realistic in light of the recent earnings turnaround.

Valuation discounts a further earnings recovery: On our EBIT 17-19e estimates of EUR56mn, EUR 65 mn and EUR 75 mn FACC trades at an about 10% discount on EV/EBIT 17-19e and at a roughly 20% discount on PER 17-19e, which is likely explained by the below average operating margin of FACC (RCB est. 8.0-8.5% in FY 18-21e) vs. peers (10-11%) and risks with respect to a prolonged turnaround. In a bull case expecting FACC to come nearer its upper end operating margin target of 10% implying operating profit of roughly EUR 100 mn (vs. RCB est. EUR 81 mn) in FY 20/21e we calculate a fair value of approx. EUR 20 per share.

Among the main further upside triggers we see potential M&A which could increase FACC's work share on Boeing programs and a boost for Chinese aviation programs for which FACC could be well positioned with respect to its Chinese core shareholder AVIC-Group holding roughly 55%. We see renewed production bottlenecks as a consequence of the strong volume growth and USD weakness (we assume an open position of some EUR 350-400 mn hedged at about EUR/USD 1.15 for FY 17/18e) as the main downside risks.

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