5th Nov 2014 10:40
LONDON (Alliance News) - Meggitt PLC Wednesday said its organic revenue increased in the third quarter, buoyed in particular by growth in its civil aerospace markets, but its total revenue declined as it took a hit from currency movements and as sales declined at its energy business.
The engineer of compenents for aerospace, defence and energy markets also cautioned that its organic growth rate is set to slow in the fourth quarter.
However, its shares rose after it announced a new share buyback and analysts deemed the third quarter statement to be better than the low expectations reflected in the company's recent share price performance.
In its statement, Meggitt said organic revenue, which excludes acquisitions, disposals and currency movements, rose 5% in the third quarter of 2014, as 18% growth in civil original equipment, 4% growth in civil aftermarket and a return to 5% growth in military offset a 7% decline in energy revenue.
The company had previously warned that some of its expected energy revenue would be deferred into 2015 and said that was starting to take effect. The problem came after the local Brazilian content provider for its Heatric heat exchanger unit filed for protection from creditors in July. It said in August that it expected USD25 million to USD30 million of revenue to be deferred in 2015.
"In energy, we do not yet have full clarity on the impact of the financial difficulties being experienced by our Brazilian local content provider, but based on current projections we assume a further USD10 million of revenue will be delayed from 2014 into 2015," it warned Wednesday.
Meggit said it expects further improvement in the civil aftermarket for the remainder of the year, although the strong third-quarter growth rate will moderate in the fourth quarter. It also said it had made good progress in military since its first-half results, with the level of arrears related to the lack of availability of US government inspectors declining. It cautioned that this issue isn't yet fully resolved and it isn't expecting any further catch-up in the fourth quarter.
"As a result of the above, the 5% organic growth rate seen in the third quarter is expected to moderate in the final quarter," it added.
It said it currently expects organic revenue to grow by a low- to mid-single digit percentage in 2015.
Meggitt also said it has decided that maintaining a normal net debt/Ebitda ratio of between 1.5 times and 2.5 times is appropriate, while maintaining flexibility to move outside either end of that range if appropriate. It is therefore going to start a share buyback on November 6 with the intention of achieving a ratio of 1.5 times or slightly above by the end of 2015.
It cited a current lack of sizeable acquisition opportunities which meet its investment criteria as one reason for the ration decision.
"The board will continue to evaluate future M&A and growth opportunities, and the potential for further capital returns, on an ongoing basis," it said.
"We estimate the buyback to be up to circa GBP250 million and could be c.6% accretive to FY16E EPS assuming an average share price of 480 pence," Investec wrote in a note to clients.
Liberum thinks the Meggitt buyback equates to about GBP300 million, or 8% of Meggitt's market capitalisation, and expects the dividend to grow in line with earnings also.
Investec noted that Meggitt guided to low- to mid-single digit revenue growth in 2015, but thinks recent sterling weakness should be helpful to revenue next year assuming the pound remains at current levels against the dollar. Accretion from the share buyback and forex should help offset about 2% to 3% organic downgrades to consensus for 2015 earnings per share, it said.
Investec has a Hold recommendation on Meggitt and a price target of 480 pence. Liberum also has Meggitt at Hold, with a 500 pence price target.
Meggitt shares were up 5.8% at 465.50 pence Wednesday morning, the second-best performing stock on the FTSE 100 and the stock's highest level since late September. Still, the stock is down 11.8% so far in 2014.
By Steve McGrath; [email protected]; @stevemcgrath1
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