ResearchWe've initiated a position in aerospace leader Safran

We've initiated a position in aerospace leader Safran

Aug 31, 2021

Start your engines. Titan’s Offshore portfolio now includes Safran (SAFRY), one of the largest aerospace companies in the world. Safran holds leading market positions in the aircraft propulsion, aircraft equipment, space and defense markets, making it a very attractive addition to our Offshore strategy. Safran and GE’s joint venture, CFM International, is one of the most successful aerospace engine franchises in the world, with a staggering 75% market share of global narrow body aircraft engine production.

Safran is currently trading at a valuation of 12x 2022 EV / EBITDA, which is attractive on both an absolute and relative basis and well below its 3-year historical average. Safran’s valuation arguably warrants a premium over its peers and should see a multiple re-rating given the company’s dominant competitive position, consistently higher operating metrics, and much higher growth expectations.

We are proud to invest our clients in Safran as the company approaches what we believe is a major inflection point.

There are three main components underpinning our SAFRY thesis:

1) Commercial aerospace is a secular growth market and Safran controls 75% market share in the highest barrier to entry part of the commercial aerospace value chain: narrowbody engines.

  • With commercial aerospace having grown at mid-single digits for the past 50 years and global passenger volumes historically levered at 2x GDP, we expect this robust growth to continue, with narrowbody aircraft growing at a compound annual growth rate of 5%+ between 2021 and 2030.

  • As an aircraft engine manufacturer, Safran operates in a duopolistic industry with rational competition, possesses sustainable advantages over potential competitors, and is equipped with exceptional staying power which limits the risk of disruption from new entrants to the market.
  • Safran holds very strong competitive positioning within the commercial aerospace market due to the significant upfront fixed costs, long product cycles (10 years+), and long-term airframer contracts associated with narrowbody engine production.

Graph1 Source: Oliver Wyman

Graph2 Sources: Company Filings, Bloomberg, IATA, Morgan Stanley

2) Safran’s LEAP engine is poised to become a key driver of revenue and profitability growth.

  • Safran’s transition to the LEAP engine has involved operating with a negative production margin due to the high fixed costs inherent to manufacturing and assembling new aircraft engines.
  • As Safran has scaled production and accelerated its learning curve timeline, the company has been able to reduce UNIT engine costs by over 50% over the past three years.
  • With more than 15,000 units of current backlog and improved operating costs efficiencies, Safran now expects the LEAP engine to reach breakeven and begin operating at a profit in 2023/2024.
  • As Safran continues executing this dynamic fleet transformation strategy from the CFM56 to the LEAP engine, we believe the next-generation LEAP engine will be a key driver of revenue/profitability growth, contributing more than $1B in operating income by 2024/2025.

Graph3 Sources: Company Filings, Bloomberg, IATA, Morgan Stanley

3) We believe Safran’s aftermarket/servicing business is reaching an inflection point.

  • Safran’s aftermarket division is an attractive “razor and blade” business model, with 98% of engine sales flowing through to engine aftermarket servicing.

  • Importantly, the aftermarket/servicing industry is highly regulated with Federal Aviation Administration approval required for all aircraft parts, components, and engines before use in servicing and maintenance. As a result, Safran maintains a protected competitive position, as key suppliers for Airbus and Boeing’s MRO (maintenance, repair, overhaul) services.
  • As of 2021, Safran’s installation base consists of 35,000+ CFM56/LEAP engines in service, with an average age of 8 years. The fleet age profile is critical because the FAA requires aircraft engines to undergo scheduled maintenance once the engine reaches ~20,000-25,000 hours – typically between 8-10 years after the engine’s first flight.
  • Based on our research, we estimate that 45% of these CFM56/LEAP engines have not undergone their first scheduled shop visit, while 40% have had only one shop visit to date.
  • Given the high-margin nature of the aftermarket business — CFM/Safran earns ~60% margins on spare parts, and ~20% margins on MRO services — we expect increased aftermarket service volumes to be a key driver of earnings growth, as evidenced by the 15% earnings-per-share compound annual growth anticipated between 2021-2024.

Graph4 Sources: Company Filings, Bloomberg, IATA, Morgan Stanley

We have strong conviction that SAFRY stock could reach $49 by 2023: 60% upside / 20%+ IRR from today’s prices

We believe that Safran offers an attractive value proposition, enabling our clients to potentially capitalize on the secular growth of commercial aerospace. By investing in one of the leading aerospace engine manufacturers with dominant market share, compelling unit economics, and multiple growth drivers, we have strong conviction that Safran stock could reach $49 by 2023, translating to 60% upside / 20%+ IRR from today’s prices.

Cash Management

Smart Cash

Smart Cash FAQs

Cash Options

Get Smart Cash

InstagramTwitterYoutubeLinkedIn

© Copyright 2024 Titan Global Capital Management USA LLC. All Rights Reserved.

Titan Global Capital Management USA LLC ("Titan") is an investment adviser registered with the Securities and Exchange Commission (“SEC”). By using this website, you accept and agree to Titan’s Terms of Use and Privacy Policy. Titan’s investment advisory services are available only to residents of the United States in jurisdictions where Titan is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities or investment products. Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings and other information provided are for illustrative purposes only and are not to be considered investment recommendations. The content on this website is for informational purposes only and does not constitute a comprehensive description of Titan’s investment advisory services.

Please refer to Titan's Program Brochure for important additional information. Certain investments are not suitable for all investors. Before investing, you should consider your investment objectives and any fees charged by Titan. The rate of return on investments can vary widely over time, especially for long term investments. Investment losses are possible, including the potential loss of all amounts invested, including principal. Brokerage services are provided to Titan Clients by Titan Global Technologies LLC and Apex Clearing Corporation, both registered broker-dealers and members of FINRA/SIPC. For more information, visit our disclosures page. You may check the background of these firms by visiting FINRA's BrokerCheck.

Various Registered Investment Company products (“Third Party Funds”) offered by third party fund families and investment companies are made available on the platform. Some of these Third Party Funds are offered through Titan Global Technologies LLC. Other Third Party Funds are offered to advisory clients by Titan. Before investing in such Third Party Funds you should consult the specific supplemental information available for each product. Please refer to Titan's Program Brochure for important additional information. Certain Third Party Funds that are available on Titan’s platform are interval funds. Investments in interval funds are highly speculative and subject to a lack of liquidity that is generally available in other types of investments. Actual investment return and principal value is likely to fluctuate and may depreciate in value when redeemed. Liquidity and distributions are not guaranteed, and are subject to availability at the discretion of the Third Party Fund.

The cash sweep program is made available in coordination with Apex Clearing Corporation through Titan Global Technologies LLC. Please visit www.titan.com/legal for applicable terms and conditions and important disclosures.

Cryptocurrency advisory services are provided by Titan.

Information provided by Titan Support is for informational and general educational purposes only and is not investment or financial advice.

Contact Titan at support@titan.com. 508 LaGuardia Place NY, NY 10012.