Selling Aerostructures Will Create A Pure-Play Fluid Conveyance And Thermal Management Business

Key Takeaways

• The divestment of Aerostructures positions Senior as a focused business, enhancing margins by concentrating on high-margin segments with intellectual property.
  
• Efficiency improvements and strong order intake in key divisions promise robust revenue growth and earnings potential, notably from Spencer Aerospace's impressive sales increase.
  
• Transition risks and revenue impacts from business sales, market softness, and restructuring could strain profitability amid rising debt and borrowing costs.

Catalysts

Designs, manufactures, and sells high-technology components and systems for the original equipment manufacturers in the aerospace, defense, land vehicle, and power and energy markets in North America, the United Kingdom, South Africa, India, China, and internationally.

• The sale of the Aerostructures business is progressing, with positive negotiations and buyer interest, which could unlock shareholder value and better position Senior as a pure-play fluid conveyance and thermal management business. This could positively impact net margins as the company focuses on higher-margin segments with rich IP content.
  
• Strong order intake with a book-to-bill ratio of 1.12, along with notable contract wins in both Aerospace and Flexonics divisions, underpins confidence in future revenue growth. This indicates expected revenue stability and growth driven by strong demand in both divisions.
  
• Operational efficiencies and improving supply chain stability in the Aerospace division, including actions to mitigate temporary headwinds from Boeing's production issues, are expected to drive margin expansion, enhancing net margins and profitability in 2025.
  
• The success of newly acquired Spencer Aerospace, which saw sales growth of 135% over two years, demonstrates the potential for significant earnings growth from its continued expansion and margin improvements. This is likely to improve earnings as Spencer further ramps up its double-digit margin capabilities.
  
• The planned improvements in Aerostructures' performance from a loss-making position to an expected operating profit of £9 million to £11 million in 2025, particularly in the second half, could significantly boost earnings. This improvement, along with increasing aircraft production rates and better contract pricing, supports strong future profitability.

Senior Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Senior's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.7% today to 6.6% in 3 years time.
• Analysts expect earnings to reach £68.6 million (and earnings per share of £0.16) by about March 2028, up from £25.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.3x on those 2028 earnings, down from 25.9x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 25.4x.
• Analysts expect the number of shares outstanding to decline by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.49%, as per the Simply Wall St company report.

Senior Future Earnings Per Share Growth

Risks

• The transition to a new CFO and the ongoing sale of the Aerostructures business may introduce execution risk and potential disruption, impacting future revenue stability and profitability.
  
• The Boeing strike and Airbus Tier 1 supplier issues in 2024 resulted in suppressed production volumes and profit impacts, indicating potential volatility in revenue and margins if similar disruptions occur in the future.
  
• Flexonics experienced a 6% revenue decline, with market softness, particularly in land vehicles and upstream oil and gas, which could persist and put pressure on revenue growth and net margins.
  
• An increase in net debt and anticipated higher borrowing costs in 2025, due to refinancing of matured notes, could negatively affect net profits and lead to cash flow constraints.
  
• Potential restructuring costs and necessary alignment of headcount to match reduced volumes in certain divisions may continue to burden earnings, as seen in the headcount reductions taken above the line in 2024.

Valuation

• The analysts have a consensus price target of £1.933 for Senior based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £1.0 billion, earnings will come to £68.6 million, and it would be trading on a PE ratio of 14.3x, assuming you use a discount rate of 7.5%.
• Given the current share price of £1.64, the analyst price target of £1.93 is 15.3% 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.