Safran ready to Leap ahead

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For Safran, a key highlight of the year just gone was the delivery of the 20,000th CFM56 engine, a milestone reached during what chief executive Jean-Paul Herteman describes as a "solid performancein an unsettled civil aerospace environment".

Solid certainly describes the CFM International 50-50 joint venture with General Electric. It is approaching its 40th birthday and underpins Safran's major business segment, aerospace propulsion. But as its 2009 results reveal, the French manufacturing major is showing potential for strength across the board, including in business segments that have provided cause for concern.

The propulsion segment delivered 1,263 CFM56s - down five units from the record set in 2008 - and accounted for 54.3% of group revenue and, at €628 million ($855 million), nearly 90% of group operating revenue. Net orders of 795 units were down from 2008's historical high, but the production backlog is "very solid" at more than five years' production.

LONG-TERM PROSPECTS

Worldwide, CFM spare parts revenue was down 4.6%. Herteman points to market volatility as seen in previous crises, and the estimated number of CFM-equipped aircraft shop visits falling 6% to 2,273. But the CFM outlook is "very strong", with 7,000 second-generation CFM56s yet to make a first shop visit, says Zafar Khan, an equity analyst at French investment bank Société Générale. He expects spares revenue to double over 10 years.

safran sales by segment

Khan has some medium-term concern in the output of Airbus A320s and Boeing 737s, where CFM has a 75% market share. But, he says, Safran has pulled a coup in placing its CFM56-successor Leap X on the Comac C919: "That's a hedge against China taking market share from Airbus and Boeing."

David Perry at Goldman Sachs Global Investment Research also likes the C919 deal, estimating its value at $5 billion in original equipment and $10 billion from the aftermarket, over 30 years.

If Safran has a problem division, it is aerospace equipment. The Messier-Dowty landing gear unit has been hit by falling business jet sales, the phase-out of the Airbus A340 and delays to the Boeing 787. And the nacelles business has been losing money, with excess A340 capacity and heavy investment in the A380 left partly idle by Airbus's failure to ramp up production of the type.

Khan believes a turnaround could come with a rise in the A380 production rate. He also sees Boeing's 787 delays as having put Safran in a strong position to renegotiate the price for 787 landing gear, potentially turning that programme into a profit-maker for Messier-Dowty.

Perry thinks the division will turn around better than Safran forecasts, with the company's target of a 6-8% profit margin by 2012-13 being cautious given peers' double-digit returns.

Defence sector revenue grew 11.6% to €1.06 billion, including 3% organically. Avionics growth was in excess of 10%.

The security business - including GE Homeland Protection acquired last year - is Safran's growth star, gaining 30.1% sales to €904 million. Organic growth of 11.4% highlights the significance of a sector that will surely be an expansion focus for defence and aerospace companies for years to come. Safran is well-placed in Europe and the USA.

Safran also has strong suits in cash generation and cost control. Herteman stresses the reduction in net debt over the course of 2009 to €498 million despite net acquisitions of €551 million; operating profitability was high, generating €1.04 billion cash. Perry says the company has made "enormous strides" in cutting costs, and sees €150-200 million more coming out annually for several years.

ACQUISITIONS

Strategically, Khan says management has time and money to consider acquisitions, with some prospect of asset swaps with Thales, which could take some defence operations in exchange for biometrics or swipe cards for Safran's security division. The French government is a significant shareholder in both firms, and Khan regards it as keen to see such rationalisation, but sees no appetite for a revival of the merger proposal ditched in 2007.

Société Générale lifts Safran from "hold" to "buy" and Goldman Sachs reiterates its "conviction buy" rating. Says David Perry: "Safran has had an incredible year."