(News Bulletin 247) – The bank raised its purchase opinion on the aeronautical equipment and engine manufacturer, seeing an entry point with the decline in the stock that has occurred since the beginning of December. Jefferies anticipates a significant increase in earnings per share over the coming years and believes that the company is too conservative in its forecasts of visits to its workshops.

Second largest increase in the CAC 40 last year (+33.01%), Safran, however, experienced a downturn at the end of 2024. On December 5, the stock of the aeronautical equipment and engine manufacturer fell by 7, 3%.

The company then revealed disappointing cash and profitability targets as part of its investor day. The stock has since not regained its price prior to these announcements, still falling by 4% (at Monday’s close).

For Jefferies, this decline constitutes an entry point into a high quality stock. On Monday evening, the bank raised its advice on the stock to “buy”, compared to “hold” previously, and increased its price target to 260 euros compared to 230 euros previously. Which gives, at Monday’s closing price, a potential of nearly 19% to the stock.

This change in recommendation brings Safran which signed one of the strongest increases in the CAC 40 this Tuesday, gaining 2.8% around 3:30 p.m. this Tuesday, January 14.

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A course on sale

Jefferies points out that Safran is no longer as expensive a stock as it once was. The stock now trades for less than 20 times expected operating profit and its premium compared to the shares of other civil aeronautics groups is at a historic low. In addition, the stock suffers from a 20% discount compared to its partner General Electric (with whom it co-owns the company CFM International), a level considered “significant” by the bank.

Safran thus displays a relatively low valuation while the company is destined to experience a significant improvement in its earnings per share. Jefferies includes in its forecasts average growth of 21% per year for the period 2023-2028.

This profit growth will be driven in particular by the robust outlook for after-sales services, particularly in engines. Safran derives, in fact, the bulk of its profitability from these activities which include maintenance, repairs, overhaul and sales of spare parts. Safran’s results are therefore dependent on company visits to its workshops and, in turn, on air traffic and aircraft flight cycles.

On this point, Jefferies believes that Safran’s management is proving too cautious – the company is known for its conservatism in its forecasts – in its outlook. The group indicated, during its day dedicated to investors, that it was counting on workshop visits which would fall below 2,000 units in 2028 for its CFM56 engine, the best-selling aircraft engine in the world. Which seems too little in the eyes of the bank given that the flight hours on CFM 56 engines aged from 5 years to 19 years (and therefore eligible for a workshop visit) increased by 20% in 2024 compared to to 2019, the year preceding the Covid-19 pandemic.

The rise of Leap

While workshop visits for CFM56 engines are indeed expected to peak in 2025-2026, Jefferies expects them to be more resilient thereafter than management forecast. The bank also estimates that prices could also partly compensate for the decline in volumes after this peak in 2025-2026.

Beyond the CFM56 engine, Safran’s results will be driven by the progressive contribution to revenues and margins from the Leap engine. This new generation engine succeeded the CFM56 and powers the Boeing 737 Max family of aircraft and the Airbus A320 neo family.

Safran will begin to recognize profits on this engine in 2025 for the Leap 1-A (Airbus) and in 2026 for the Leap 1-B (Boeing). The group is counting on a sharp increase in revenues from this engine in line with the ramp-up of its production. Workshop visits would increase from less than 1,000 in 2023 to around 3,000 in 2028 and 5,000 in 2040. By the latter date, Safran’s revenues from after-sales services will have doubled.

“The Leap is only now reaching maturity and represented a major driver of the growth of civil AM (after-sales services editor’s note) in 2024,” underlines Jefferies.

Apart from these favorable business prospects, Jefferies highlights beneficial exchange rate effects for the group with the appreciation of the dollar as well as the absence of a downward catalyst for the company now that the investor day has passed.

In addition, the imminent signing by the Indian Navy of the contract to purchase 26 Rafale aircraft should generate additional cash for Safran. The group, which supplies the plane’s M88 engine and various equipment (ejection seats, wiring, landing and braking systems, etc.), will in fact receive part of the deposit paid by the Indian authorities. Which, according to Jefferies, should happen in the first half of the year.