Safran: Safran's cash and profitability targets for 2028 make the stock market wince

(BFM Bourse) – The aeronautical equipment and engine manufacturer has delivered its medium-term outlook with objectives that are far from expectations. Positive point, however: the company plans to repurchase 5 billion euros of shares between 2024 and 2028.

Safran has hardly accustomed the market to disappointments. Renowned for its solid execution, the engine and aeronautical equipment manufacturer has been battling, in recent months, with Schneider Electric, to achieve the best performance in the CAC 40 over the whole of 2024.

The group led by Olivier Andriès, however, risks being left behind by the electrical infrastructure company in the home stretch, following this Thursday's drop.

Safran suffered by far the biggest decline in the Parisian index, dropping 5.1% around 11:30 a.m., while the CAC 40 rose 0.37% at the same time.

The market sanctions the announcements of the group which delivered, ahead of its day dedicated to investors, its short and medium term objectives.

>> Access our exclusive graphic analyses, and gain insight into the Trading Portfolio

Benefit from the boom in air traffic

Safran has confirmed its 2024 outlook. The equipment manufacturer also communicated preliminary objectives for next year, expecting revenue growth of around 10%, on current operating income of between 4.7 billion and 4.8 billion euros (compared to 4.1 billion expected this year) and on a free cash flow of between 2.8 billion euros and 3 billion euros.

This last amount takes into account a negative impact of 320 million to 340 million euros linked to the temporary increase in corporate tax in France which was planned in the finance bill for 2025. This measure, however, risks d be postponed indefinitely after the government's censorship voted on Wednesday evening.

By 2028, this time, Safran expects to achieve average annual growth of 7% to 9%, thanks to “growth in air traffic, defense budgets, the ramp-up of production, and price,” the company explains. Remember that Safran's activity is very dependent on air traffic. The group derives the bulk of its profitability from its lucrative after-sales services (maintenance, overhaul, sales of spare parts) which are linked to visits to its workshops, and therefore to the flight cycles of aircraft used by airlines. .

Safran also plans to achieve current operating income of between 6 billion and 6.5 billion by 2028, reflecting average growth of 13% per year. The company has assigned current operating margin objectives to each of its divisions.

Propulsion will have to exceed a rate of 20% each year, with the ramp-up of service activities for Leap engines. These engines constitute the new generation sold by CFM international, its joint venture with General Electric. They equip Boeing's 737 max as well as the Airbus A 320 neo family, and succeeded the CFM 56, the best-selling aircraft engine in the world.

The defense division will have to achieve a current operating margin of around 15% in 2028 while the rate stands at 10% for aircraft interior equipment.

Greater caution than usual

Concerning its cash generation, Safran intends to generate a cumulative free cash flow over the period 2024-2028 of 15 billion euros to 17 billion euros. In terms of capital allocation, the company has announced its desire to buy back 5 billion euros worth of shares over the period 2025-2028.

The fact remains that all these objectives turn out to be far from expectations. Jefferies notes that the current operating profit target is 10% below the mid-range consensus. For cash generation, the gap is even 22%. The bank notes, however, that the share buybacks of 5 billion euros represent “the only positive point of this publication”.

“At first glance, these targets may disappoint many, particularly because consensus expectations had adjusted in recent months following Safran's comments that recognizing margins on services activities Leap would be done at the end of the period (more than 80% of this margin will be recognized after 2028, Editor's note). But let's not forget that Safran is traditionally cautious in setting medium-term objectives”, nuance Oddo BHF.

“Safran's management is known for its prudence, but the financial objectives for 2028 disclosed this morning have exceeded Safran's historical levels of prudence,” judges Barclays for its part.

Julien Marion – ©2024 BFM Bourse