| 2012 | 2013 | ||||||
| Price: | 4.13 | EPS | €0.30 | €0.60 | |||
| Shares Out. (in M): | 578 | P/E | 13.7x | 6.9x | |||
| Market Cap (in $M): | 2,387 | P/FCF | NA | NA | |||
| Net Debt (in $M): | 3,420 | EBIT | 1,110 | 1,230 | |||
| TEV (in $M): | 5,807 | TEV/EBIT | 5.2x | 4.7x | |||
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Finmeccanica is the leading Italian defense company, 30% owned by the Italian Treasury. It was once a diversified industrial conglomerate and still retains remnants of those assets but most have been sold/spun off and replaced with aerospace and defense assets, many outside Italy. The Italian defense market accounts for less than 20% of group sales, the other large exposures include the UK (via Marconi which was purchased from BAE) and the US (mainly via the ill-timed DRS acquisition in 2008). Finmeccanica also has a large exposure to the civil aerospace market, principally via helicopters and aerostructures, where it is a large supplier to Boeing, especially for the 787. It remains the second largest industrial company in Italy.
The crisis described above resulted in a sweeping change of management. The new CEO since 2011 is Giuseppe Orsi, who formerly ran the Helicopter division (Agusta Westland) successfully and who has a more aggressive and hands-on approach than previous leadership. Other positively perceived appointments include Gian Cutillo last May as CFO (came from Energia) and William Lynn as head of DRS and FNC North American CEO (he was number 2 guy at Pentagon).
As things stand today, Finmeccanica has adequate liquidity (end year net debt is projected at €3.5bn) and there is only one maturity of €800m at the end of next year) but European investors are very skittish about financial risk, despite an asset disposal plan that management expects to generate €1bn by year end, the proceeds of which will go to debt reduction. The part sale and spin off of the rail business is also possible by year-end. The recent rally in the share price is the result of reports that a sale of the company's 55% stake in Ansaldo Energia might get done.
Core businesses and recent trends:
Agusta-Westland Helicopters: extremely strong and profitable global market leader in military and medium size civil helicopters...this division is improving its margins and generating + cash flow and is the jewel of the group
Alenia Aeronautics: sell military aircraft (Eurofighter, jet trainers, military transports), civil aerostructures (Boeing, Airbus), smaller civil aircraft ...flat order growth (tough y/y comp) but recently had impressive wins including €850mm to Israeli Air Force
Selex Defence Electronic:, one of two European and UK leaders alongside Thales in radar, air traffic control, radio etc. Also 25% share in MBDA European missile JV....earlier innings in reorganization plan and still tough backdrop given budget cuts
Defense systems: armoured vehicles, naval guns, torpedoes – all strong niches
Thales Alenia Space, JV with Thales to build and operate satellites – Competes primarily with EADS
Ansaldo Energia (55% stake), power plant manufacturer, already part sold to PE shop First Reserve, balance expected to be sold to Siemens or state investment company ot other soon
Rail, includes the signalling business which has already had 60% taken public as Ansaldo STS (STS IM) and the loss making rolling stock business (Ansaldo Breda) which is wholly owned; the latter could be partly sold soon to allow Finmeccanica to deconsolidate rail...Hitachi and others have been mentioned as possible buyers
Real estate and other assets
The thesis for going long: The process of fixing bad contracts and reducing costs to meet a lower volume environment is well under way. In addition management is committed to divest non core businesses, reduce debt and refocus on the core aerospace and defense assets. The improved profitability and liquidity should highlight the value of the simplified remaining pieces to investors. The stock is cheap enough that one does not have to assume any significant pickup in market share or the aerospace cycle, all of which would be additional upside.
Broad restructuring plan in process
2013 savings target of €440mm seems achievable since most of it is from reduced headcount of 1800 people. 70% of actions necessary to achieve these savings have already been taken and €247mm of the total is expected in 2012. If accomplished this should improve margins by 200bp. So far the evidence of progress is positive based on better than expected 1H2012 results. First half 2012 EBITDA up 10% and margins improved by 50bp to 5.7% with helicopter and aerospace improving, offset by weakness in defense and electronics and space.
Plan to unify Selex (which has many subdivisions spread amongst avionics, military and secure communications) can add upside to savings. New management has been hired and cost savings plans are being presented to the board in second half of 2012 with some disclosure likely by year end.
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