(News Bulletin 247) – In a sector note, the German bank raised its opinion to buy on the aeronautical group, judging that the tensions on its supply chain are easing. The bank also lowered its advice on Safran to “hold”.
Without necessarily constituting the most fashionable sector, aeronautics had a good year in 2023 on the stock market. Safran has beaten its all-time highs and has gained 40% since January 1, signing the second strongest performance in the CAC 40 over this period. Airbus is also reaching its historic highs (140.88 euros this Friday at 11:33 a.m.) and is up 26.9% over the whole of 2023.
Even the defense groups Dassault Aviation (+13.15%) and Thales (+14.5%), which had jumped last year with the outbreak of the crisis in Ukraine, posted honorable performances. And what about the British engine manufacturer Rolls-Royce which is awarded…210% for the whole of 2023?
In a note devoted to the aeronautics and defense sector, Deutsche Bank estimates that these securities, despite their good performance this year, still have “fuel” in terms of valuation.
“We believe that a further increase is possible for two reasons,” underlines the establishment. “Firstly, the resilience of the sector (particularly in defense) makes it a privileged exposure compared to companies with a shorter (economic, editor’s note) cycle such as capital goods. Secondly, we note that in past cycles, the sector aeronautics and defense has reached a peak in valuation with a 16-fold increase in enterprise value in relation to the operating profit of the following year compared to 13 times today,” develops Deutsche Bank.
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Airbus ready to meet its objectives
The German bank especially took advantage of the opportunity to review its opinions on the different stocks in the sector. The establishment has therefore decided to return to “purchase” on Airbus, against “hold” previously, while raising its price target to 152 euros against 130 euros previously.
Which brings the Airbus title, which rose 1.8% on the Paris Stock Exchange this Friday around 11:35 a.m., and therefore reached its all-time high.
For Deutsche Bank, Boeing’s competitor sees “the light at the end of the tunnel”. For months, Airbus has had to deal with significant tensions on its supply chain, which has complicated the ramp-up of its production, particularly on its key family, the A320 neo. The company had also quite clearly missed its aircraft delivery objective last year.
The German bank nevertheless emphasizes that these logistical difficulties are easing. “There is growing evidence that the supply chain has reached an inflection point in the second half of 2023,” the bank writes.
“Some Airbus suppliers, such as Figeac Aero or Honeywell Aerospace, have recently spoken out about the supply chain situation, arguing that the supply of raw materials is less problematic for titanium and stainless steel. Honeywell Aerospace went further, declaring that it saw ‘the health of the supply chain improving, without a doubt,'” Deutsche Bank said.
Airbus has made 623 deliveries since the start of the year, and only has 97 left to make in December to reach its 2023 target. Which, according to Deutsche Bank, seems well within reach for the group, in to the extent that the company had delivered 98 in December 2022 “in a much more difficult environment”.
Defense in the tough
Deutsche Bank expects an increase in Airbus deliveries in 2024, counting on 817 aircraft (compared to a target of 720 for this year for the group). Remember that deliveries are carefully monitored by the market since most of the payment for an aircraft is made when the customer receives it in due form. The more aircraft Airbus delivers, the more cash it generates.
The German bank is showing slight caution in the medium term. Airbus has repeatedly stated that it is targeting a monthly A320 neo production rate of 75 aircraft by 2026; Deutsche Bank is retaining 73.
“Ultimately, the outlook for delivery in 2024 may still seem fragile, but there is more certainty in the longer term,” judges Deutsche Bank.
Certainly, everything is not “rosy” at Airbus, considers the establishment which points to the rather “alarming” situation of the Defense and Space division of Airbus whose operating margin has fallen to 0%. Airbus is also working on a “transformation” of this unit to improve its competitiveness. But Deutsche Bank argues that this division cannot get worse and, above all, that Airbus’ civil aeronautics activities largely eclipse the weakness of this division. So much so that the difficulties of space and military activities have no impact on the group’s prospects this year.
In addition to Airbus, Deutsche Bank also revised its opinion on Safran, from buy to “neutral”, while adjusting its price target to 170 euros from 176 euros previously. The German bank continues to believe that the group offers a “solid” “equity story” (the story that a company tells to the market to attract it). But given the stock’s recent rise, she sees only limited upside for the stock.
The German bank also raised its price target on Dassault Aviation (from 209 euros to 216 euros) and on Thales (from 158 euros to 166 euros) while remaining a purchase on both stocks. Deutsche Bank considers that catalysts still exist for Dassault, with potential new Rafale orders. The establishment judges that Thales constitutes “a relative safe haven for 2024, and considers that its rise in cybersecurity should begin to bear fruit next year as well as in 2025.
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