Travel demand should pick up rapidly once Covid-19 tapers off and this aircraft manufacturer is all ready for it
Paris-listed Airbus SE is a global aeronautics and space company that operates three main segments, which are Airbus aircraft, defence and space, and helicopters. Our case for Airbus is that it is a play on the global pandemic recovery. Even if new variants and strains of the virus emerge in the future, society and governments are likely to find a way to contain the virus with less need for travel and social movement restrictions, as compared to when it first appeared. Thus, aircraft manufacturers such as Airbus should be better equipped to weather any pandemic related shocks. Further, these restrictions are not likely to persist for long periods, and travel demand should pick up rapidly once the pandemic-related panic tapers off.
Airbus is a leading manufacturer of aircraft globally with a few types of aircraft. The A220, for example, is one of the company’s answers to the pandemic, where this aircraft is mainly delivered to airlines looking to right-size operations post-pandemic. The A350 is a new generation aircraft designed to reduce operating costs and carbon emissions, which is a step in the right direction for ESG-related matters. The other aircraft models are larger and centred around the commercial market’s demand for air travel. We think that the company has taken the right steps to manage its inventory by, for example, focusing its resources on delivering more cost-efficient aircraft. This was after wide-body aircraft had suffered much during the height of the pandemic.
The helicopter segment contributes roughly 10% of the company’s revenue. Airbus is a global leader in the civil and military helicopter market and provides relatively stable earnings compared to its aircraft manufacturing business, which can be used to cushion some losses if another pandemic-related shock were to occur. The defence and space segment contributes around 20% of the company’s revenue and also provides good earnings stability which is not too sensitive to the air travel demand. Airbus is Europe’s top defence and space company and covers the design and delivery of military aircraft, space system services such as deep space exploration and space transportation capabilities and solutions for military and commercial applications.
Airbus is expected to deliver a higher number of aircraft in its upcoming financial results announcement in mid-February. This estimate is much higher than the guidance and is expected to boost the share price if it crystallises. In terms of its order book, the company commented that 2021 went better than expectations, with a strong possibility of sustainable sector recovery moving into 2022. This statement was based on its 507 net aircraft orders, well within its targets. If anything, sentiment for the company remains strong heading into 2022. Despite pressure from the virus, Airbus has seen better than expected deliveries and we think this justifies our case. Furthermore, despite the latest Omicron virus strain, the company has not seen any major disruption in orders and deliveries, indicating that the virus situation is likely to be contained better compared to when the pandemic first started.
The company’s key priorities for the upcoming year include managing deliveries and its backlog; focusing on more profitable and cost-saving aircraft, including defence contracts; and preparing itself for the commercial aircraft ramp-up as travel demand picks up. Other key goals that should provide further earnings support for the company include transforming the commercial aircraft industrial value chain, for example, for its A320 and A350 aircraft, and leading the development of sustainable aerospace. On the financial front, the company intends to focus on its earnings and cash growth trajectory beyond 2021 which is a good thing seeing how the company is focused on cash flow despite being in a sector that was arguably one of the most hard-hit by the pandemic.
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Chart 1 illustrates the company’s financials from the peak of the pandemic till the latest earnings announcement. We can see that the company still remains profitable and is cash flow positive despite pandemic-related headwinds. This supports our case that the company will be able to weather any future pandemic-related shocks. In terms of financial safety, the company has a current ratio of 1.13 times and is net cash, so liquidity and solvency should not be a concern for the company. In terms of yields, the company has an earnings yield, operating cash flow yield and free cash flow yield of 4.7%, 6.3% and 2.1% respectively, which is relatively attractive compared to the risk-free rate of 1.2%. Compared to global peers, the company trades at a 2% discount for its forward P/E, and an 11% discount for its forward EV/Ebitda, implying that the company is one of the more attractive pickups within the aerospace industry. Airbus has a stock beta of 1.64 times, denoting that it is volatile, as expected from a company in an industry heavily hit from the pandemic.
Sentiments-wise, there are 23 “buy” calls, five “hold” calls and no “sell” call on the company from analysts. The average target price for the company is around 25% above its current trading price of EUR114.42 ($172.60). Based on our in-house valuations, we think this company has the potential to hit upwards of 30% gains in share price over the next 12 months as we believe the pandemic related effects will wane. As travel demand picks up, Airbus should be able to see better than expected deliveries in the upcoming financial quarters. Even if the pandemic persists, the company’s helicopter, defence and space sectors should be able to support earnings while the company focuses on delivering cost-efficient and profitable aircraft and managing its unprofitable inventory. This stock is for investors who have a slightly higher risk appetite and want to invest in companies recovering from the pandemic.
