COMAC 919 Orders And Croatia Expansion Will Reduce Production Costs

Key Takeaways

• Expanding production capabilities and rising aircraft program contributions are expected to drive revenue growth and enhance FACC's market position.
  
• Strategic initiatives in cost reduction and operational efficiency are projected to improve margins and strengthen future earnings.
  
• Supply chain volatility, reliance on Airbus, and financial strain threaten FACC's financial health and require effective cost reduction initiatives.

Catalysts

Engages in the development, production, and maintenance of aircraft components and systems worldwide.

• FACC is expecting an increase in growth due to the rising production rates of major aircraft programs, including significant contributions from the Airbus A350 and Boeing 787, which will enhance revenue through increased aircraft build rates.
  
• The ramp-up of the COMAC 919 program with new orders worth approximately €120 million indicates a strengthening order backlog, which will support future revenue growth.
  
• FACC's expansion into a new production facility in Croatia is aimed at cost reduction and productivity gains, which are expected to enhance net margins by lowering production costs and increasing efficiency.
  
• The transfer of production work to China along with the use of local supply chains is projected to reduce labor and material costs, which should improve earnings through higher operational efficiency and cost management.
  
• FACC's strategic focus on inventory reduction and working capital efficiency is expected to unlock at least €50 million in cash by the end of 2025, having a positive impact on free cash flow and effectively supporting earnings improvement.

FACC Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming FACC's revenue will grow by 9.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 4.5% in 3 years time.
• Analysts expect earnings to reach €50.4 million (and earnings per share of €1.11) by about March 2028, up from €21.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, down from 17.0x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 17.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.19%, as per the Simply Wall St company report.

FACC Future Earnings Per Share Growth

Risks

• Supply chain volatility and challenges, particularly from lower-tier suppliers, may impact operational efficiency and result in increased costs, affecting FACC's net margins.
  
• The reliance on a major customer like Airbus, which comprises a significant portion of FACC's revenue, could pose a risk if there are any disruptions or changes in demand, potentially impacting FACC's overall revenue.
  
• Negative free cash flow driven by working capital and inventory buildup indicates financial strain; unless addressed, this could harm FACC’s liquidity and overall financial health.
  
• Delays or low ramp-up in wide-body aircraft production, compounded by external factors like Boeing's strike, might dampen expected revenue growth.
  
• The necessity to successfully execute significant cost reduction and efficiency improvement initiatives, such as relocating production to Croatia and China, entails execution risks that could affect FACC's earnings if not managed effectively.

Valuation

• The analysts have a consensus price target of €10.2 for FACC based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €12.0, and the most bearish reporting a price target of just €7.6.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.1 billion, earnings will come to €50.4 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 7.2%.
• Given the current share price of €7.79, the analyst price target of €10.2 is 23.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.