Successful Vega C Launches And US Defense Ventures Will Expand Future Opportunities

Key Takeaways

• Successful Vega C transition and U.S. defense market entry position Avio for revenue growth via expanded launch capabilities and defense contracts.
  
• Increased order backlog and factory capacity utilization efforts are likely to improve revenue and net margins by spreading fixed costs.
  
• Dependency on timely launches and new orders introduces risks to revenue and margins, alongside potential cash flow volatility and integration challenges from U.S. expansion.

Catalysts

Through its subsidiaries, designs, develops, produces, and integrates space launchers in Italy and internationally.

• The successful transition from the Vega to the more advanced Vega C launcher, including the successful test flights of the new Zefiro-40 motor, positions Avio for increased revenue growth through expanded launch capabilities and a growing backlog of contracts with entities like the European Commission.
  
• Avio's expansion into the U.S. defense market through a partnership with ACMI to design and plan a solid rocket motor production facility could significantly impact future earnings by capturing a larger share of defense contracts.
  
• The tenfold growth in defense order backlog since 2019, and the anticipation of further growth with the potential Polish contract for CAMM-ER, suggest a substantial future increase in production volumes and revenues.
  
• Avio's focus on achieving full factory capacity utilization by 2025, coupled with the increase in defense and space contracts, is likely to positively affect net margins by spreading fixed costs across higher production volumes.
  
• The company's strategic initiatives and confirmed 2024 guidance indicate a strong outlook for future cash flow generation, driven by increased order intake and backlogs, supporting a potential improvement in their net financial position.

Avio Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Avio's revenue will grow by 8.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.5% today to 3.9% in 3 years time.
• Analysts expect earnings to reach €19.8 million (and earnings per share of €0.63) by about February 2028, up from €9.7 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 26.4x on those 2028 earnings, down from 39.9x today. This future PE is lower than the current PE for the GB Aerospace & Defense industry at 29.5x.
• 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 9.12%, as per the Simply Wall St company report.

Avio Future Earnings Per Share Growth

Risks

• The company has recently retired the Vega launcher, creating a potential risk of transitional challenges or delays affecting the roll-out of the Vega C, which could impact future revenues if the replacement program does not meet launch schedules or performance expectations.
  
• There appears to be a strong reliance on securing significant new orders in the near term to meet guidance, which introduces uncertainty. A shortfall in expected order intake could negatively affect backlog growth and revenue projections.
  
• Avio is expanding its defense business significantly, but this transition entails integration and execution risks that could impact net margins if scale and existing infrastructure do not efficiently support increased production demands.
  
• The company's financial stability is subject to seasonal variations and potential liquidity stress from contingent cash flow shifts and the need to manage substantial cash advances, which can affect net financial position and overall cash generation stability.
  
• The venture to establish new production facilities in the U.S. could lead to increased capital expenditures and operational costs. If unforeseen costs arise or expected defense orders do not materialize as planned, earnings and free cash flow could be adversely impacted.

Valuation

• The analysts have a consensus price target of €16.1 for Avio 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 €20.0, and the most bearish reporting a price target of just €14.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €512.8 million, earnings will come to €19.8 million, and it would be trading on a PE ratio of 26.4x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of €15.38, the analyst price target of €16.1 is 4.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.