AVIO | Company update
BUY (unchanged) Analyst: Martino De Ambroggi | [email protected]| +39 02 6204 239 Target: € 16.8 (prev. 16.0) | Risk: High
EQUITY RESEARCH ALL PROGRAMMES ARE PROGRESSING AS EXPECTED Italy | Space The strong demand of new satellites to be placed in orbit assures excellent
long-term visibility. The growing number of launches (from 9 to be gradually increased to 16 in 2023) guarantees top-line growth. The ramp-up STOCK DATA of the new engines production (P120 for the new Vega C and Ariane 6 from Price € 13.04 2020 and M10 upper stage for the new Vega E from 2024) allows operating Bloomberg Code AVIO IM margin expansion. We raise our long-term estimates. Market Cap. (€ mn) 344 Free Float 71% The launchers business is in a long-term growth path Shares Out. (mn) 26.4 The management estimates that the mass of satellites to be launched in the 52-week range 10.34 - 15.78 decade 2018-27 will grow by 3% CAGR with a stronger 9% CAGR in the LEO Daily Volumes (mn) 0.07 sub-segment which is the reference market for Vega (responsible for 53% of Avio’s revenues). We see Vega extremely well-positioned to benefit from this
PERFORMANCE 1M 3M 12M trend since it is the youngest and most reliable among the few available alternatives in the LEO arena (i.e. the Indian PSLV and the US Minotaur). Absolute 0% 10% -15%
Rel. to FTSE all shares 8% 14% -6% The Space sector is attracting huge financial resources Over the last 10 years the space sector attracted more than $ 18 bn equity 2018 2019E 2020E MAIN METRICS investments, of which almost 50% destined to the launchers business. In Net revenues 388.7 398.5 406.0 FY18 investments reached $ 3 bn and in the 1Q19 already exceeded $ 1.7 Adjusted EBITDA 47.3 46.5 49.4 bn, driven by the largest fundraising round to date finalized by OneWeb ($ Adj. net income 26.9 27.4 28.4 1.25bn - aiming to build a constellation of 650+ satellites to provide full global Adj. EPS - € cents 102.1 104.1 107.7 internet commercial coverage by 2021). This is a clear demonstration that Adj. EPS FD - € cents 99.1 101.0 104.5 the demand is strong and accelerating, improving the visibility for the DPS ord - € cents 44.0 44.0 44.0 growing number of Vega and Ariane families launches.
MULTIPLES 2018 2019E 2020E We confirm FY19 estimates while moving up the following years P/E adj 10.7 x 12.5 x 12.1 x We basically confirm our FY19 estimates, in line with the guidance: P/E adj FD 11.1 x 12.9 x 12.5 x net revenues -2/+4% YoY to € 380-405mn (with 9 launches, +1 vs 2018) EV/Adj. EBITDA 5.1 x 6.5 x 6.3 x EBITDA -1/+3% YoY to € 42-44mn (with R&D incentives flat at € ~7mn) net income before minorities -3/+5% YoY to € 25-28mn order backlog at € 750-800mn, covering ~2x the sales. REMUNERATION 2018 2019E 2020E For the 4-year period 2020-23 we revise upwards on avg. sales by 3%, EBIT by Div. Yield ord 4.0% 3.4% 3.4% 4% and net profit by 5%, factoring in the benefit from economies of scale and the FCF yield 6.0% 1.9% 1.2% contribution of the new engines to margins expansion.
INDEBTEDNESS 2018 2019E 2020E We reiterate our Buy recommendation because of the … Net fin. position FD 59.5 50.8 43.5 key role in the European launchers business (being the only provider of Debt/Adj. EBITDA FD n.m. n.m. n.m. all boosters for both Ariane and Vega current and future versions) Interests cov 64.2 x 87.0 x 117.2 x best-in-class worldwide reliability of its launchers (intended as failures on number of flights) growing reference market driven by several end-market applications PRICE ORD LAST 365 DAYS (navigation, meteorology, earth observation, …) and replacement demand (satellites avg. useful life is 2/7 or 10/15 years depending on the orbit) visible growth due to higher number of launches (from 9 to 16 in 2023) and new development projects funded by the ESA (2018 backlog € 0.88bn) new P120 engine (in final development phase) for both Ariane 6 and Vega C starting from 2020 (up to 36 units p.a.), exploiting economies of scale new methane oxygen engine M10 (under development), allowing to expand the value added chain (substituting third party’s AVUM stage) net cash position allowing the exploitation of new strategic options. DFCF-based target +5% to € 16.8 PS (or FD FY20E adj. PE ~16x and EV/adj. EBITDA ~8.5x).
June 5, 2019 1 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT #220
AVIO | June 5, 2019
MAIN FIGURES € mn 2016 2017 2018 2019E 2020E 2021E Net revenues 292.0 343.8 388.7 398.5 406.0 419.0 Growth 13% 18% 13% 3% 2% 3% Adjusted EBITDA 36.5 46.5 47.3 46.5 49.4 50.0 Growth 3% 27% 2% -2% 6% 1% Adjusted EBIT 26.9 32.3 33.2 31.0 32.4 32.5 Growth 21% 20% 3% -7% 4% 0% EBIT 13.2 25.0 28.5 28.0 29.9 31.5 Growth 26% 89% 14% -2% 7% 5% Profit before tax 6.3 21.5 27.9 27.5 29.5 31.2 Growth 43% 243% 30% -1% 7% 6% Net income 1.3 18.2 24.3 24.5 26.3 27.8 Growth -71% 1260% 34% 1% 7% 6% Adj. net income 13.4 21.8 26.9 27.4 28.4 28.5 Growth -31% 63% 23% 2% 3% 0% MARGIN 2016 2017 2018 2019E 2020E 2021E Adj. EBITDA margin 12.5% 13.5% 12.2% 11.7% 12.2% 11.9% Adj. EBIT margin 9.2% 9.4% 8.5% 7.8% 8.0% 7.8% EBIT margin 4.5% 7.3% 7.3% 7.0% 7.4% 7.5% Profit before tax margin 2.1% 6.2% 7.2% 6.9% 7.3% 7.4% Net income margin 0.5% 5.3% 6.3% 6.2% 6.5% 6.6% Adj. net income margin 4.6% 6.3% 6.9% 6.9% 7.0% 6.8% SHARE DATA 2016 2017 2018 2019E 2020E 2021E EPS - € cents 5.8 73.5 92.2 93.0 99.6 105.5 Adj. EPS - € cents 57.8 88.1 102.1 104.1 107.7 108.2 Adj. EPS FD - € cents 49.3 80.3 99.1 101.0 104.5 105.0 Growth -31% 63% 23% 2% 3% 0% DPS ord - € cents 0.0 38.0 44.0 44.0 44.0 44.0 VARIOUS - € mn 2016 2017 2018 2019E 2020E 2021E Capital employed 343 296 254 268 291 308 FCF 11 -7 17 6 4 16 Capex 24 29 23 35 33 27 Net working capital -45 -86 -82 -84 -79 -76 INDEBTNESS - €mn 2016 2017 2018 2019E 2020E 2021E Net financial position -19 42 49 40 33 37 D/E 0.06 x n.m. n.m. n.m. n.m. n.m. Debt/EBITDA 0.7 x n.m. n.m. n.m. n.m. n.m. Interests cov 3.9 x 11.0 x 64.2 x 87.0 x 117.2 x 163.4 x Net financial position FD -8 52 60 51 43 47 MARKET RATIOS 2016 2017 2018 2019E 2020E 2021E P/E 182.9 x 18.6 x 11.9 x 14.0 x 13.1 x 12.3 x P/E FD 214.5 x 20.4 x 12.3 x 14.4 x 13.5 x 12.7 x P/E adj 18.2 x 15.5 x 10.7 x 12.5 x 12.1 x 12.0 x P/E adj FD 21.4 x 17.0 x 11.1 x 12.9 x 12.5 x 12.4 x MARKET RATIOS 2016 2017 2018 2019E 2020E 2021E EV/Net revenues 0.90 x 0.92 x 0.62 x 0.76 x 0.76 x 0.73 x EV/Adj. EBITDA 7.2 x 6.8 x 5.1 x 6.5 x 6.3 x 6.1 x EV/Adj. EBIT 9.8 x 9.9 x 7.2 x 9.8 x 9.6 x 9.4 x EV/CE 0.8 x 1.1 x 0.9 x 1.1 x 1.1 x 1.0 x REMUNERATION 2016 2017 2018 2019E 2020E 2021E Div. Yield ord 0.0% 2.8% 4.0% 3.4% 3.4% 3.4% FCF yield 4.3% -2.0% 6.0% 1.9% 1.2% 4.5% ROE 4.4% 7.6% 9.7% 9.4% 9.3% 8.9% Adj. ROCE 6.9% 11.0% 12.3% 11.0% 10.6% 10.0%
BACKLOG 2016 2017 2018 2019E 2020E 2021E Order backlog 776 952 877 679 673 654 Order intake 162 521 314 200 400 400 Book to bill 0.6 x 1.5 x 0.8 x 0.5 x 1.0 x 1.0 x Book to revenues 2.7 x 2.8 x 2.3 x 1.7 x 1.7 x 1.6 x Source: Company data and EQUITA SIM estimates
2 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
Ariane 5 launcher Vega launcher BUSINESS DESCRIPTION
AVIO is a leading international space propulsion system provider (solid, liquid and cryogenic) born in 1912 as explosive maker (a pre-requisite to enter in the space business) and in the past 50 years evolved from supplier of solid rocket motors to system integrator and prime contractor. It was listed in Apr-17 through the business combination with Space2 SPAC.
It plays a strategic role in the space industry through 2 European launcher programmes: it provides the boosters and liquid-oxygen turbopumps to Ariane 5, the European heavy launcher for satellites up to 10 tons (for broadcasting and telecom applications) in the Geostationary Earth Orbit (GEO) at 36k km altitude it is the prime contractor for Vega, the European light launcher for satellites up to 2 tons (for weather forecasting, earth observation and satellite internet constellations) in the Low Earth Orbit (LEO) at 300-2k km altitude.
Divisional net revenues breakdown (2018) A launcher is a rocket capable of placing satellites accurately into space for both institutional (public authorities or government agencies) and commercial clients Tactical (private companies). According to the Satellite Industry Association, the launchers propulsion Other Vega 3% 0% sector in FY18 was worth $ 6.2bn; it enables the access to space with a multiplier 56% effect on satellite manufacturing (~3x) and ground and satellite services ~20x.
The critical success factor for a launcher is reliability: both Vega (14 out of 14 Ariane successful launches) and Ariane 5 (failure rate <2% on 103 launches) are the best-in- 41% class at worldwide (market average failure rate is 6.0%).
The launchers sector is oligopolistic (~90% of the market was accounted for by Russia, US, China and Europe), typically funded by massive public financial investments (in Europe Orders backlog (€ mn) and backlog to sales (x) the European Space Agency - ESA), with very high technological entry barriers, long-cycle business (18-24 months from when an order to build a launcher is placed and is launched 1000 5.0 x into orbit) and with no competition from Chinese and Japanese (operating only in their 4.0 x 750 closed markets).
3.0 x 500 The most important demand drivers are emerging commercial customers for the 2.0 x 250 deployment of mega constellations in LEO (such as One Web, Space X, eightyLEO and 1.0 x Globalstar) and replacement demand given that the avg. useful life is 10-15 years for a 0 0.0 x GEO/MEO satellite and 2-7 years for a LEO one (>2k satellites are into orbit).
Orders backlog Avg.backlog (2005-16) The strategy envisages: Backlog to sales Avg. backlog to sales (2005-16) consolidation of its existing market position, supply chain consolidation through insourcing/acquisition of critical industrial supplies to improve margins and reduce dependency on external suppliers Capex (€ mn) and capex to sales (%) efficiency improvements (streamlining ground infrastructure operations and flight readiness as well as launch frequency) Capex Capex to sales Capex to sales 2013-17 avg. new product development (P120 engine, Vega C/E and Ariane 6, lowering the 40 10% 35 9% launch costs and improving the launchers versatility) 8% 30 7% industrial evolution towards production automation, volume scale up and 25 6% 20 5% reduction of product platforms leveraging the commonalities provided especially 15 4% by the new P120 motor across the Ariane 6 and Vega C launchers 3% 10 2% 5 1% In Orbit (the investment vehicle participated by 67 Avio managers, including the CEO, 0 0% 2013 2014 2015 2016 2017 2018 2019E 2020E first-line, second-line, third-line and retired managers) owns 4%. Last April it rounded up its stake buying ~30k shares at an avg. price of € ~12.5 PS; since 2017 it invested € 1.5mn, demonstrating the strong commitment of the top management. The Italian State-controlled aerospace and defense company Leonardo (AVIO shareholder since 2003) owns 25% and Space Holding (the company that promoted the business combination) owns 6%.
Strengths/opportunities Weaknesses/threats
Key role in the European Space sector Smaller size and no diversification compared Oligopolistic market/high technological entry barriers to much larger competitors High reliability of Ariane5 and Vega launchers Only one spaceport (French Guiana) Growing market, particularly for LEO Public budgets constraints High visibility supported by the order backlog Price pressure Innovation: new launchers (Ariane 6, Vega-C Competitors reusable technology and Vega-M and new P120C engine) Flights failure causing costs and delays Carried forward tax losses (est. at € >100 mn) Erratic orders intake/downpayments
3 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
THE REFERENCE MARKET SHOWS STRONG GROWTH
During the presentation held on March 15th, the management highlighted the strong market growth trend based on the independent research of Euroconsult:
in 2018 global launches recorded a spike: achieving the all-time high at 114 flights vs the avg. of 89 over the previous four years
NUMBER OF LAUNCHES WORLDWIDE
Source: company presentation (Mar-19)
the mass of satellites to be launched in the decade 2018-27 is expected to grow by 3% CAGR with a stronger growth in the LEO segment (the reference market for Vega) equal to 9% CAGR
WORLD TOTAL MASS AT LAUNCH (TONS)
Source: Avio estimate on Euroconsult data; excluding satellites with mass <50 Kg
in the Low Earth Orbit (LEO) the management estimates that the 2018-27 potential market is worth 362 tons (intended as launch mass) mainly concentrated in satellites with a weight below 2 tons which is exactly the reference market for Vega
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AVIO | June 5, 2019
2018-27 LEO DEMAND CONCENTRATED ON SATELLITES <2 TONS IN MASS
SOURCE: Avio estimate on Euroconsult data; excluding the American, Chinese, Russian, Japanese institutional markets and satellites with mass <50 Kg
the LEO demand is driven by smaller satellites below <0.5 tons. Among the several already announced projects OneWeb is for sure one of the most important, aiming to create a communications network with a constellation of satellites to enable Internet access for everyone. Last March it secured its largest fundraising round to date amounting to $1.25 bn (led by SoftBank Group Corp., Grupo Salinas, Qualcomm Technologies Inc., and the Government of Rwanda), bringing the total funds raised to $3.4 bn. In early 2019 its first 6 satellites were successfully launched through a Soyuz launcher. OneWeb will grow its constellation to more than 650 satellites launching more than 30 satellites per rocket, to allow customer demos in 2020 and provide full global commercial coverage by 2021.
in the competitive arena Vega is well positioned since it is the youngest and most reliable among the few available alternatives (i.e. the Indian PSLV and the US Minotaur)
OVERVIEW OF LEO LAUNCHERS
Source: company presentation from launchers’ user manuals
over the last 10 years the space sector attracted more than $ 18 bn equity investments of which almost 50% destined to the launchers segment.
5 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
SPACE SECTOR: EQUITY INVESTMENTS IN SPACE VENTURES
Source: Space Angels Investment Report (4Q18)
The total investments in 1Q19 increased by 80% vs 4Q18, driven by the inflow associated with the $ 1.25-bn OneWeb fundraising. Other smaller, earlier-stage rounds went to younger Satellite companies like Tarana, Swarm Technologies, Isotropic, and Cesium Astro. The total investments recorded in the 1Q19 amounted to $ 1.7+bn equivalent to roughly 55% of the total amount invested in FY18 (around $ 3 bn).
SPACE SECTOR: INVESTMENTS ($ bn) AND OF DEALS BY QUARTER (#)
Source: Space Angels Investment Report (1Q19)
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AVIO | June 5, 2019
OTHER HIGHLIGHTS FROM THE ANALYSTS’ PRESENTATION
During the above mentioned presentation some company-specific topics also emerged:
the R&D tax incentives: in 2018 the positive contribution was € 7.4 mn (vs € 6.2 mn in 2017); ex-this effect, EBITDA would have increased by ~6% YoY. Although the budget law for the 2-year period 2019-20 cut the incentive cap from € 20mn to € 10mn (pending the potential extension until 2023), the management does not foresee any significant P&L impact in the coming years because the installments of what accrued in the 2-year period 2017-18 must still be recorded
a study of a new Mini Vega (a smaller Vega version to launch smaller satellites) will be carried out, but it is still premature to say if it will be realized; in case of a positive outcome it would capture additional business with limited cannibalization risk
the new P120 engine (to be used on both Ariane 6 and Vega C vs the currently existing two different boosters): we believe that the benefit of the economy of scale will improve margins, but management prefers to maintain a conservative approach
THE BACKLOG REMAINS STRONG
The order backlog is healthy at € 877 mn as of December 2018, covering more than 2 years of annual revenues. This figure exceeds by more than € 200 mn the FY18 guidance provided at the beginning of the year also because it includes the contract for the last Ariane 5 batch which was expected to be signed in 2019 (amounting to over €100mn).
ORDERS BACKLOG (€ mn) and BACKLOG TO SALES (x) 1000 6.0 x
750 4.0 x 500
2.0 x 250
0 0.0 x
Orders backlog Avg.backlog (2005-16) Backlog to sales Avg. backlog to sales (2005-16) Source: Equita SIM estimates and company data
It is worth underlying that in FY19 we project a contraction of the order intake and backlog just because in the launchers business the order flow is erratic, following the cadence of: both new batches of launches (typically on a semi-annual/annual basis) and development projects to be funded as defined every two years by the European inter-ministerial committee. Since the above mentioned Ariane 5 batch was anticipated to 2018 and the development contracts will likely be signed in early 2020 (because the committee is scheduled in November) we expect a lower 2019 collection. However this does not jeopardise the equity story since it is a typical feature of this business.
7 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
NET CASH REMAINS HIGH
The net cash was € 49 mn as of Dec-18. As already explained in our previous notes it will be used to finance the capex for the new P120 engine (both development and new plant): the total capex in the 4-year period 2018-21 should be around € 120 mn and for the insourcing/acquisition of strategic technology and/or critical industrial supplies, with the aim of consolidating margins and reducing dependency on external suppliers, or alternatively operators in the satellite industry.
We estimate the financial flexibility for potential acquisitions exceeds € 70 mn, but so far no clue has emerged on potential thoughts.
VEGA: 14TH IN A ROW SUCCESSFUL LAUNCH (A GLOBAL FIRST)
On March 21st the first Vega launch of the year (VV14) was successfully finalised, placing the Italian Space Agency’s PRISMA satellite into orbit; it will allow the monitoring of pollution and climate changes.
For the Vega this is the fourteenth consecutive successful launch since it became operational in 2012 (a global first), confirming its absolute reliability.
Vega was also successful from the commercial standpoint: apart from the “captive” launches (for both the ESA and the European Union) it signed contacts for a widespread client base across all continents.
INTERNATIONAL COMMERCIAL SUCCESS FOR VEGA
Source: Company presentation
For Avio, this was the first of the three Vega launches planned in FY19 (out of the total nine flights).
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AVIO | June 5, 2019
FY19 GUIDANCE IN LINE WITH EXPECTATION (EXCEPT SLIGHTLY HIGHER REVENUES)
We basically confirm our FY19 estimates which are aligned with the management guidance.
net revenues -2/+4% YoY to € 380-405mn (with 9 launches, +1 vs 2018) vs € 378mn
EBITDA -1/+3% YoY to € 42-44mn (with R&D incentives similar to last year, i.e. € 7mn) vs € 43mn
net income before minorities -3/+5% YoY to € 25-28mn vs € 25.6mn (or € 24.1mn post minorities)
order backlog -14/-9% YoY to € 750-800mn vs € 700mn; the drop is due to the anticipation of some contracts already recorded in 2018 and to the expectation that the orders which will be defined during the ministerial conference in November will be signed in 2020.
AVIO: FY19 MANAGEMENT GUIDANCE
Source: Company presentation
9 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
POSITIVE ESTIMATES REVISION
The Avio business has two profit sources: production: both Vega launchers and the boosters for Ariane family development: programmes, mainly financed by the European Space Agency with the funds provided by all the European countries.
The production revenues are easy to estimate since the growing number of launches guarantees top-line growth, mainly driven by the Vega (since each flight means about € 40-mn additional revenues) while for Ariane 6 we forecast some pricing pressure. In the following table we present the trend in volumes and prices over the medium-/long-term.
AVIO: REVENUES BY DIVISION (€ mn)
2016 2017 2018 2019E 2020E 2021E 2022E Ariane 143 42% 150 39% 161 37% 156 36% 143 36% 122 30% 123 30% Vega 137 40% 177 46% 206 47% 210 48% 240 60% 270 66% 275 66% Tactical propulsion 10 3% 15 4% 19 4% 17 4% 15 4% 15 4% 15 4% Other 2 0% 2 0% 2 0% 2 0% 2 1% 2 0% 2 0% NET REVENUES 292 86% 344 89% 389 88% 385 88% 400 100% 409 100% 415 100% Change 13% 18% 13% -1% 4% 2% 1% GROSS REVENUES incl. pass-through 340 100% 385 100% 440 100% 436 100% 400 100% 409 100% 415 100% Change 22% 13% 14% -1% -8% 2% 1% Ariane 16% 5% 7% -3% -8% -15% 0% Vega 14% 29% 17% 2% 14% 13% 2% Tactical propulsion -9% 45% 32% -14% -9% 0% 0%
PRODUCTION 2016 2017 2018 2019E 2020E 2021E 2022E Ariane launches 6 6 6 6 7 8 9 Ariane value per launch 17 17 17 16 14 14 13 Change n.a. -2% -1% -3% -13% 0% -11% Ariane production 102 71% 100 66% 99 96 98 112 113 Vega launches 2 3 3 3 4 4.5 5 Vega value per launch 40 41 41 40 40 40 40 Change n.a. 2% -1% -1% 0% 0% 0% Vega production 80 58% 123 69% 114 120 160 180 200 Total production 218 75% 223 65% 238 61% 216 56% 258 65% 292 71% 313 75% DEVELOPMENT Ariane 30 21% 51 34% 50 60 45 10 10 Vega 44 32% 51 29% 99 90 80 90 75 Total development 74 25% 102 30% 149 38% 150 39% 125 31% 100 24% 85 21% * all the production and development split between Vega and Ariane are based on EQUITA SIM estimates Company data and EQUITA SIM estimates
The development business is more difficult to predict since it depends on different programmes which are funded by the bi-annual European inter-ministerial committee whose amount is not disclosed (such as Z40 second static firing test, P120 third static firing test, Critical Design Review of Vega C2 and Vega C Qualification Flight in 1Q20) and the work-in-progress status is impossible to be monitored as an external observer. We only know that the weight of development revenues over the past few years increased up to the peak of 38% of FY18 net revenues because of the simultaneous on-going development of both Vega C and P120 engine. This percentage is destined to go down because both projects are close to the end and we believe the upcoming will be smaller as combined effect.
Compared to our last note, we basically confirm our FY19 estimates which are coherent with the management guidance; we lower the net cash by € 16 mn to factor in both the IFRS 16 fist application (€ 6mn), the higher capex (€ ~8 mn) and the higher dividend (€ 1.6mn).
10 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
For the following years, we revise slightly upwards our revenues, based on the higher than expected backlog and updated expectations on the number of flights and on prices and more than proportionally also the operating margins for the beneficial impact of the synergies for the P120 common engine (see the following section)
AVIO: CHANGE IN 2019-20E ESTIMATES (€ mn)
FY19E % FY19E % Change FY20E % FY20E % Change FY20E % FY20E % Change Prev. Curr. Prev. Curr. Prev. Curr. Revenues 378.0 100.0 398.5 100.0 5% 394.0 100.0 406.0 100.0 3% 404.0 100.0 419.0 100.0 4% Incr. % -3% 3% 4% 2% 3% 3% Adj. EBITDA 45.5 12.0 46.5 11.7 2% 46.9 11.9 49.4 12.2 5% 48.1 11.9 50.0 11.9 4% Incr. % -4% -2% 3% 6% 3% 1% EBITDA 42.5 11.2 43.5 10.9 2% 44.4 11.3 46.9 11.6 6% 47.1 11.7 49.0 11.7 4% Incr. % 0% 2% 4% 8% 6% 5% Adj. EBIT 30.0 7.9 31.0 7.8 3% 29.9 7.6 32.4 8.0 8% 31.0 7.7 32.5 7.8 5% Incr. % -10% -7% 0% 4% 4% 0% EBIT 27.5 7.3 28.0 7.0 2% 27.9 7.1 29.9 7.4 7% 30.0 7.4 31.5 7.5 5% Incr. % -4% -2% 2% 7% 8% 5% Pre-tax profit 27.0 7.1 27.5 6.9 2% 27.5 7.0 29.5 7.3 7% 29.7 7.4 31.2 7.4 5% Incr. % -3% -1% 2% 7% 8% 6% Net Income 24.0 6.4 24.5 6.2 2% 24.3 6.2 26.3 6.5 8% 26.3 6.5 27.8 6.6 6% Incr. % -1% 1% 1% 7% 8% 6% Net financial position 56.3 40.4 -28% 52.4 33.1 -37% 68.5 37.0 -46% Source: Equita SIM estimates
It is worth underlying that the IFRS 16 first application has a minor impact on Avio’s P&L as already indicated in the simulation reported in FY18 balance sheet our estimates include the contribution of the R&D tax credits under the new regime
THE NEW P120 ENGINE: A MARGIN EXPANSION DRIVER
As planned (see also our basic study n. 155 dated April 7th 2017) the development of the new first stage solid-propellant engine, P120C (successor of the P80 currently in use for Vega), is expected to be finalized by the end of 2019, with an increased on- board propellant capacity (from 88 to 141 tons).
This technological development is of particular significance for AVIO since the P120C will be used not just for the Vega C but also for the Ariane 6 (whereas currently Vega uses P80 and Ariane 5 uses a different solid-propellant rocket engine).
As a result, based on ESA long-term strategy the production volumes of a single engine will increase significantly: from the current 3 per year of the P80 for Vega (1 per launcher with an average frequency of 3 launches per year) potentially to an average of 36 per year for the P120C in 2023, of which: o 32 for Ariane 6 (from 2 to 4 per launcher with a targeted mixed frequency of 11 launches per year) o 4 for Vega C (1 per launcher with a frequency of 4 launches per year)
11 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
AVIO: EFFICIENCIES FROM THE NEW P120 ENGINE
Source: Company presentation
As a result, we believe AVIO will benefit from otherwise unthinkable economies of scale. Although we believe that part of this advantage will flow back to the supply chain, we expect that it will contribute to expand AVIO's operating margins in the long term.
RESEARCH AND DEVELOPMENT TAX RECEIVABLES (UPDATE)
The tax credit for R&D projects was initially introduced in 2013. It became applicable for Avio as a consequence of the regulatory framework developments in 2017 (valid also for resident companies undertaking R&D commissioned by certain non-resident countries, such as enterprises located in other member states of the European Union – in the Avio case commissioned by the European Space Agency). This benefit must be recognized to the P&L on the basis of the advancement of these activities, proportionate to the advancement of the costs incurred for the long-term orders (mainly referring to the future generation of Vega C and Vega E launchers) to which the benefit refers.
In 2017 the total accrued credit was € 20 mn (equal to maximum possible on annual basis) of which o a benefit of € 6.15 mn was recognized in the P&L o the residual amount of € 13.85mn will be recognized in the following years over the duration of the R&D orders and will derive from the effective advancement of the orders. In 2018 the total accrued credit was € 10.6 mn (below the € 20-mn cap because of a more restrictive interpretation on the involved costs) a benefit of € 7.42 mn was recognized in the P&L of which o € 4.51 mn accrued in 2018 o and € 2.90 mn referring to last year residual the residual credit accrued in 2018 is € 6.09 mn (=€ 10.6 – 4.51 mn) plus what accrued in 2017 is € 11.05 mn (=€ 13.85 – 2.90 mn) will be recognized in the following years over the duration of the R&D orders and will derive from the effective advancement of the orders.
From a regulatory viewpoint, this tax break initially concerned the 2017-20 period with a cap of € 20 mn p.a. The new Italian budget law approved last December cut the annual cap from € 20 mn to € 10 mn p.a. (while so far the expiry remained unchanged differently from the initial intention to extend it to 2023).
12 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
This change has a limited impact on our short-term estimates since we had not factored in the maximum possible amount.
TAX-CREDIT RECOGNIZED IN THE P&L: OUR ASSUMPTION
YEAR 2017 2018 2019E 2020E 2021E 2022E 2023E 2024E 2025E TOTAL 2017 6.0 2.9 2.5 2.4 2.3 2.1 1.8 20.0 2018 4.5 2.2 1.2 1.1 1.0 0.7 10.6 2019 2.5 2.0 1.1 1.0 0.9 2.5 10.0 2020 2.0 2.0 1.5 1.5 1.5 1.5 10.0 TOTAL 6.0 7.4 7.2 7.6 6.4 5.6 4.9 4.0 1.5 65.6 Red figures: declared numbers Source: Equita SIM estimates and company data
As far as the financial profile of these credits is concerned, the cash-in is quite quick, exploiting the compensation with social security contributions. As a matter of fact Avio already collected a double digit sum in 2018 and a similar amount is expected in 2019.
A FURTHER POTENTIAL LONG-TERM UPSIDE: THE M10 ENGINE
The Lyra program financed by the Italian Space Agency (ASI) since 2004 enabled Avio to study the potential evolution of the Vega launcher to increase the Vega loading capacity by 30% (up to 3k Kg in a LEO of 700 Km).
VEGA LAUNCHER: MAIN COMPONENTS
Source: Company picture
The experience and results obtained with the demonstrator engine LM10-MIRA constituted a reliable starting platform for development of the liquid and methane oxygen engine M10. On November 13th the first firing test was successfully completed. Both the technologies regarding the propulsive efficiency and the environmental impact are innovative.
The goal of the program was to enhance the performance of the Vega launcher by replacing the third stage Zefiro 9 and the AVUM stage with an innovative LOX/CH 4 liquid propellant system. They will be used in flight for Vega E, expected to be have its maiden flight in 2024
13 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
AVIO: ZEFIRO 9 AND AVUM ENGINES
Source: Company picture
Since AVUM is currently provided by an Ukrainian partner, through this innovation Avio will be able to further increase the percentage of the Vega internally produced (currently ~70%) getting a further slice of the added value (20+%).
A further potential upside is represented by the possibility to sell this technology to third parties but it is a long-term potential evolution.
14 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
VALUATION +5% TO € 16.8 PS
DFCF-based target price +5% to € 16.8 PS driven by the upward revision in estimates..
ASSUMPTIONS AVIO: DFCF ANALYSIS (€ mn) g 2.0% 2019E 2020E 2021E 2022E 2023E 2024E Beyond WACC 7.6% Sales 399 406 419 447 472 501 511 Change % 2.5% 1.9% 3.2% 6.7% 5.5% 6.2% 2.0% EBITDA 44 47 49 53 55 54 44 Change % 2.2% 7.8% 4.6% 7.1% 3.8% -0.9% -18.8% Margin 10.9 11.6 11.7 11.8 11.6 10.8 8.6 D&A -16 -17 -18 -18 -19 -19 -8 Valuation EBIT 28 30 32 35 36 35 36 Change % -1.9% 6.8% 5.5% 9.5% 4.3% -2.8% 2.1% NPV of Free Cash Flows 81 Margin 7.0 7.4 7.5 7.7 7.6 7.0 7.0 NPV of Terminal Value 336 Taxes -1 -2 -2 -2 -2 -2 -4 Estimated Enterprise Value 418 EBIT after Tax 26 28 30 33 34 33 32 2018A NFP 49 Change % 0.2% 6.2% 5.5% 9.5% 4.6% -2.9% -2.5% Adjustment to NFP -19 Equity 448 Capex -35 -33 -27 -25 -25 -25 -11 Peripherals & other 8 (increase) decrease in WC 2 -6 -2 0 0 0 -1 Total Equity 456 Free Cash Flow before minorities 9 7 18 25 28 27 28 FCF Minorities -2 -2 -2 -2 -2 -2 -2 # of shares fully diluted 27.2 Free Cash Flow after minorities 7 5 16 23 26 25 27
Target Price 16.8 D iscount Factor 1.00 1.08 1.16 1.24 1.34 1.44 1.44 Upside (Downside) 29% PV of FCF 7 5 14 19 19 17 19 Source: Equita SIM estimates
AVIO: DFCF SENSITIVITY ANALYSIS (€ PS - FULLY DILUTED)
WACC 8.1% 7.6% 7.1% 1.5% 14.6 15.7 17.1 G factor 2.0% 15.5 16.8 18.4 2.5% 16.5 18.1 20.0 Source: Equita SIM estimates on Bloomberg consensus data
As we have already highlighted in our basic study n. 155 issued on April 7th 2017 a real pure comparable does not exist.
By applying the FY19-20E average multiples of our panel of peers (including German OHB, French Safran, the UK Rolls Royce and the US Aerojet Rocketdyne) we get an average valuation in excess of € 20 PS (above what we got in the past with the same exercise).
AVIO: VALUATION BASED ON COMPARABLES MULTIPLES (€ PS) *
Avg. multiples Resulting valuation 2019E 2020E 2019E 2020E Average Adj. PE 25.5 x 20.0 x 25.7 20.9 23.3 EV/Sales 1.51 x 1.41 x 23.3 21.9 22.6 EV/EBITDA 11.6 x 10.2 x 20.9 19.3 20.1 EV/EBIT 16.8 x 13.7 x 20.3 17.2 18.7 AVERAGE 22.5 19.8 21.2 * EV multiples include pension liabilities Source: Equita SIM estimates on Bloomberg consensus data
We obtain a similar conclusion by restricting the panel to what we consider the relatively most comparable company, Rocketdyne (although much larger, more diversified and focused on the US market).
15 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
AVIO: VALUATION BASED ON ROCKETDYNE MULTIPLES (€ PS) – only Aerojet *
Avg. multiples Resulting valuation 2019E 2020E 2019E 2020E Average Adj. PE 23.4 x 21.2 x 23.6 22.2 22.9 EV/Sales 1.71 x 1.62 x 26.1 25.0 25.6 EV/EBITDA 12.6 x 12.0 x 22.6 22.6 22.6 EV/EBIT 13.5 x 12.8 x 16.5 16.0 16.2 AVERAGE 22.2 21.5 21.8 * EV multiples include pension liabilities Source: Equita SIM estimates on Bloomberg consensus data
However we reckon that the smaller size, the lower stock liquidity and the lower business diversification of Avio may justify a discount vs its comparables, but the current one (~30%) appears to be really excessive.
STATEMENT OF RISKS
The primary elements that could negatively impact the stock include: Significant deterioration in the reference macroeconomic scenario Significant increase in short term interest rates European Space budget cuts European Governments instability French Guiana social problems causing launches delay New technological innovation generating price pressure Launch failures affecting the undisputed high reliability More expensive and longer than expected development programmes Changes in the R&D fiscal incentives schemes
16 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
APPENDIX 1: FY18 RESULTS WERE IN LINE WITH EXPECTATIONS
In 2018 Avio successfully completed eighth launches (two Vega + six Ariane 5) in line with expectations. Results were basically in line except slightly higher sales for better development activities - revenues +13% YoY to € 389 mn, higher than the € 364-mn expected for the better contribution of development business for the research programmes on P120 engine and new Vega C launcher - EBITDA +8% YoY to € 42.6 mn vs € 41.9mn (or basically flat excluding the contribution of the R&D tax incentives (€ 7.4 mn vs last year € 6.5 mn) - EBIT +14% YoY to € 28.5 mn vs € 27.9mn - net profit post minorities +34% YoY to € 24.3 mn vs € 24.4mn - net cash € 49 mn vs € 51 mn in spite of lower capex (€ 22.9 mn vs € 30+mn expected) due to the postponement of some investments without having an impact on the on-going programmes - backlog -8% YoY to € 877mn vs € 863mn - dividend +16% to € 0.44PS (3.7% yield when it was announced) vs expected flat at € 0.38PS.
AVIO: FY18 RESULTS (€ mn)
Source: Company presentation
In the past few years the operating margins were penalized by sizable non-recurring costs. In 2017 they amounted to € 7.2 mn (including € 3.5 mn for the business combination/IPO costs) while in 2018 they declined to € 4.7 mn. We expect a further reduction in the next few years.
AVIO: NON-RECURRING ITEMS AND ADJ. EBIT (€ mn)
2018 2019E 2020E 2021E 2022E Reported EBIT 28.5 27.5 28.7 31.0 33.5 % on sales 7.3% 7.1% 7.2% 7.6% 7.6% Personnel incentives and reorganization costs -1.1 -0.5 -0.5 0.0 0.0 Non-recurring legal and fiscal advisory costs -1.5 -0.5 -0.5 0.0 0.0 Expenses related to environmental inteventions 0.0 0.0 0.0 0.0 0.0 Personnel costs 0.0 -0.5 -0.5 -0.5 -0.5 Accuals for tax risks -0.8 0.0 0.0 0.0 0.0 Other non-recurring costs (income) 0.0 -0.5 -0.5 -0.5 -0.5 Investor fees -0.2 0.0 0.0 0.0 0.0 Other non-recurring expenses -1.2 -1.0 -0.5 0.0 0.0 Amortization of customer relationship assets 0.0 0.0 0.0 0.0 0.0 Total non-recurring costs -4.7 -3.0 -2.5 -1.0 -1.0 Adj. EBIT 33.2 30.5 31.2 32.0 34.5 % on sales 11.4% 10.4% 10.7% 11.0% 11.8% Source: Company data and EQUITA SIM estimates
17 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
APPENDIX 2: SECTOR AND BUSINESS OVERVIEW
The Launch Industry
A launcher is a rocket capable of placing satellites accurately into space for both institutional and commercial clients. According to the Satellite Industry Association, in 2017 the launchers sector was worth $ 6.2bn.
GLOBAL SPACE VALUE CHAIN (2018)
(1) Includes launcher manufacturing and launch service activities (2) Commercial services revenues only (3) Includes GNSS chipsets and Related (4) Includes commercial human flight Source: Company presentation based on Satellite Industry Association (2015)
The launch business is essential for the entire Space sector since it enables the access to space and involves several different players with a multiplier effect: satellite manufacturing ~3x, ground segment and satellite services ~20x.
Different Satellite/Orbit Requires Different Launcher
Every satellite has a specific application, it must be positioned in a specific orbit and requires a specific launcher.
Satellites for: broadcasting and telecom applications weighting up to 6 tons require heavy launcher to be positioned in GEO/GTO (Geostationary Earth/Transit Orbit) at 36k km altitude; navigation applications weighting up to 4 tons require medium launcher to be positioned in MEO (Medium Earth Orbit) at 22k km altitude; weather forecasting and satellite internet constellations weighting up to 2 tons require light launcher to be positioned in LEO (Low Earth Orbit) at 300-2k km altitude.
18 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
ORBITS, SATELLITES MASS AND APPLICATIONS OVERVIEW
Source: Company presentation
Launchers Sector Main Features
Main Space sector features: a. Oligopolistic (in the 20-year period 1998-2017 >90% of the market was accounted for by Russia, US, China and Europe); b. Very high technological entry barriers (the development of a new launcher requires several years and huge investments); c. Typically funded by massive public financial investments (for instance the ESA in Europe and the NASA in the US); d. Long-cycle business (typically it takes 18-24 months from when an order to build a launcher is placed and is launched into orbit); e. All the main economically developed countries have their own launchers with spaceports located in their own territories;
LAUNCHERS MARKET: COMPETITIVE LANDSCAPE
Source: Company presentation f. With the exception of Chinese and Japanese launchers (which only operates in their closed markets), all other operators are in competition with each other, offering their services on the "free market" of commercial clients.
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AVIO | June 5, 2019
Growing Market: Number Of Satellites To Be Launched +54% (2018-27)
Satellites end-market demand is driven by several application domains: from broadcasting to earth observation, meteorology, technology and navigation. It is composed of: institutional clients: public authorities or government agencies that typically generate captive demand foreign institutional clients: “foreign” public authorities or government agencies not having their own launchers commercial clients: private companies providing a commercial service whose launcher selection criteria is open to international competition tenders mainly including cost, reliability and versatility.
Among the most important demand drivers there are emerging commercial customers for the deployment of mega-constellations in LEO (One Web, Space X, Planet, Iridium, eightyLEO and Globalstar); replacement demand given that the average useful life is 10-15 years for a GEO/MEO satellite and 2-7 years for a LEO satellite; today there are 1.4k satellites into orbit. For instance Iridium is replacing its entire constellation of 66 GEO satellites for telecom services.
According to AVIO estimates on Euroconsult data, demand for new satellites in 2018- 2027 is expected to grow by a 54%, a total of 1.45k satellites of which - commercial +27% to 881 - and institutional 128% to 566. Due to the improving multi-payload capacity, the demand of launchers will increase less than proportionally but however it is destined to grow.
SPACE LAUNCH DEMAND (# of Satellites to Space)
Source: Company presentation
The satellites of under 0.5 tons will account for 90% of total launches given that satellites are becoming ever smaller thanks to technological breakthroughs. For this reason, the key factors for launchers will be multiple payloads, multi-orbit deployment capabilities and in-orbit maneuvering capabilities, all features that Vega has proven to possess.
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AVIO | June 5, 2019
Working Together To Guarantee The European Access To Space
All the different companies and agencies involved in the European Space sector are: pursuing a common goal (i.e. guaranteeing European access to space); coordinated by a single entity, ESA (which receives funding from the 22 member states); heavily dependent on each other. For this reason, in the absence of external shocks, we believe AVIO operating margins will not be exposed to the risk of high volatility.
Main players are:
Arianespace (AS): the commercial launch service provider for both Ariane 5 and Vega which buys launchers in batches (covering a period of 2-3 years) and assumes all payload, forex and, partially, failure risks.
Ariane group (a 50/50 jv established by Airbus and Safran, backed by German and French governments/space agencies): the prime contractor of the Ariane programme and partner to AVIO in solid propulsion through: - Regulus (60% AVIO – 40% ASL) producing solid propellant for launcher boosters and fuels Ariane and Vega’s first-stage engines; - Europropulsion (50% AVIO – 50% ASL), in charge of booster assembly.
The European Space Agency (ESA): the international organisation with 22 Member States with the mission to develop Europe’s space capability. ESA’s activities are funded by a financial contribution from all the Agency’s Member States. It invests in each Member State, through industrial contracts, an amount more or less equivalent to each country’s contribution. In the last 7 years, ESA budget on avg. exceeded € 5 bn (of which € ~1 bn for launchers).
Italian Space Agency (ASI): the organisation which coordinates all of Italy's efforts and investments in the space sector. Italy is among the most important contributor country to the ESA (around € 0.5 bn p.a.).
MAIN RELATIONSHIPS IN THE EUROPEAN SPACE SECTOR
Source: Equita SIM on multiple sources
21 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
Avio Is A Key Player For The European Space Launchers
With the support of the ESA, Europe has developed two programmes: Ariane 5 for GEO, operating since 1996; it is the world reference for heavy-lift launchers, able to carry payloads weighing more than 10 tons to GTO and over 20 tons into LEO with dual passenger capability; Vega for LEO, operating since 2012: it is a 4-stage vehicle mainly based on solid propulsion, with multiple payload capacity of up to 1,500 kg.
AVIO plays a strategic role in the European space industry being prime contractor and full systems integrator for Vega (44% of FY17 net revenues). It is responsible for a manufacturing share of ~65%;
VEGA LAUNCHER COMPONENTS
Source: AVIO internet site
industrial partner for Ariane 5 (51%), supplying the two boosters and liquid- oxygen turbopump of the Vulcain cryogenic engine. It is responsible for a manufacturing share of ~10%.
AVIO: A KEY PLAYER IN EUROPEAN SPACE LAUNCHERS
Source: Company presentation
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AVIO | June 5, 2019
AVIO also has a small tactical propulsion business (4%), a joint Italian-French programme for the development and production of the Aster 30 engine used for ground-to-air hypersonic missiles for land defence from air raids and missile attacks. This is destined to remain small, but it is a strategic asset for its know-how transferred to launchers.
Revenues are generated through both launches and R&D projects funded by ESA for specific programmes.
European Launchers Have High Reliability
The critical success factor for a launcher is reliability, which is inversely proportional to the number of failures (i.e. explosion of the launcher, damages caused to the satellite during transit and positioning in an incorrect orbit/location).
For AVIO the direct risk of bearing non-recurring costs is limited because in case of failure: after launcher delivery (both Ariane 5 and Vega), Arianespace, in its capacity as Launch Service Provider, is liable to pay up to a maximum of €60 mn; ESA and the French government are liable for the amount exceeding €60 mn; before Vega's delivery, the prime contractor AVIO is held responsible. Furthermore, in case of delays due to external factors, Arianespace is responsible for managing the schedule.
Insurance policy is also used to cover the launch risk and may account for between 4% and 8% of the cost of the launch (in proportion to proven reliability over time).
However AVIO remains inevitably exposed to direct and indirect consequences of a potential launch failure: deterioration in perceived reliability, thus a risk of lower bargaining power; increased insurance costs for future launches; costs incurred to resolve the problem; flights suspension until the problem is identified and resolved; production inefficiencies because of launch delays. cancellation of scheduled launches (the worst case scenario)
According to Space Launch Report, around 1.57k launches took place worldwide between 1998 and 2018 (53% in LEO and 47% in higher orbits). Failures were 94, or 6.0% of total launches (5.8% in LEO and 6.2% in other orbits).
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AVIO | June 5, 2019
SPACE LAUNCHES: TOTAL LAUNCHES/FAILURE RATE and CUMULATE BY COUNTRY
120 12.0%
100 10.0%
80 8.0%
60 6.0%
40 4.0%
20 2.0%
0 0.0%
1999 2010 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2011 2012 2013 2014 2015 2016 2017 2018 1998 Nr. Launches (excluding earth escape launches) % failures Avg. failures
600
500
400
300
200
100
0
2000 2001 2002 1999 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 1998 Russia China United States Europe India Japan Ukraine Others
Source: Equita SIM on SpaceLaunch report
Looking at the failure rate (number of failures/number of flights): India and Japan were the worst performers (10.0% and 12.5% respectively); Russia was close to the average (6.4%); the US and Ukraine were slightly below the average (4.8% and 4.9% respectively); China was below-average (3.8%); Europe was the best performer (2.0%), thus benefitting from a stronger bargaining power.
24 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
SPACE LAUNCHES: FAILURE RATE (number of failures/number of flights)
100.0% 100% 90%
80%
70%
60.0% 60%
50%
40% 33.3% 30% 28.6% 25.0%
20% 12.5% 10.0% 10% 6.4% 3.8% 4.9% 4.8% 2.0% 0% Europe China Ukraine United Russia India Japan New Israel Iran North South States Zeland Korea Korea Source: Equita SIM on SpaceLaunch report
Since the start of the programme Ariane 5 suffered 4 failures (of which 3 were qualification flights - when the failure risk is typically higher). The last one dates back as far as 17 years ago, whereas the others date back even further (1996, 1997 and 2001). No one caused major delays to the following flights.
More recently, the Ariane 5 flight VA 241 dated January 25, 2018 was classified as failure because of the launcher trajectory deviation (telemetry from the launcher was lost for 9 minutes and 26 seconds). One month later the Independent Enquiry Commission issued its conclusions: the anomaly’s cause is perfectly understood (i.e. an incorrect value in specifications for the implementation of the launcher’s two inertial reference systems), recommendations were clearly identified and corrective measures were immediately implemented (i.e. increase the robustness of the control of certain data used in preparation of the mission). However signals from the two satellites were acquired after the nominal mission duration, were confirmed to be in good health and they were placed in their final orbital positions, using their own propulsion systems.
On the contrary Vega did not record any single failure during its first 14 launches (a global first) and also became known for its precision in the positioning of satellites.
25 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
Several Technological Innovations Funded By The ESA
The ESA has already started and partly financed the development of programmes aimed at lowering the cost and improving the versatility of European launchers. The most important programme directly involving AVIO are: P120C engine (estimated investment of € 0.5 bn, including ASL to be finalised by 2019): the new first stage solid-propellant engine (successor of the P80 currently in use for Vega) and used for both new Vega C and Ariane 6. As a result, the production volumes of a single engine will increase from current 3 per year (P80 for Vega) to an estimated avg. of 36 P120C per year in 2023, benefiting from otherwise unthinkable economies of scale. On November 9th together with quarterly results the company announced that the first P120C booster case was successfully completed and cast with inert propellant Vega C (€ 0.2 bn – by 2019) the successor of the existing Vega, increasing the payload mass capacity by 66% to 2.4 tons, with a multi-sat dispenser for small satellites and increased performance Ariane 6 (€ 4 bn - by 2020) the successor of the Ariane 5, increasing the payload mass capacity by 5% to 11 tons, to be addressed to all kinds of missions in MEO and GEO/GTO, with two configurations (one launching up to 5 tons and one for dual-satellite launches of up to 10.5 tons) Vega E (investments are expected at 2019 Ministerial Conference – by 2024) the evolution of the Vega C, further increasing the payload by 25% to >3 tons Space Rider programme aiming to provide an affordable, independent, reusable end-to-end integrated space transportation system for routine access and return from low orbit. It will be used to transport payloads for an array of applications, orbit altitudes and inclinations. Launched a top Vega-C, Space Rider follows ESA’s Intermediate eXperimental Vehicle (IXV) which on Feb-15 performed a flawless suborbital flight with atmospheric re-entry and sea landing.
THE KEY ROLE OF THE NEW P120C (FIRST STAGE ENGINE)
Source: Company presentation
26 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
A Clear Strategy
Management’s strategy is based on the following pillars: 1. consolidation of its existing market position through an increase in Vega launches (from 3 to 4 per year) and maintaining a key presence in Ariane; 2. industrial supply chain consolidation through insourcing/acquisition of critical industrial supplies to consolidate margins and reduce dependency on external suppliers; 3. efficiency improvements, streamlining ground infrastructure operations to improve productivity and flight readiness as well as launch frequency; 4. new product development (P120C engine, Vega C/E, Ariane 6 and M10 engine);
EUROPEAN LAUNCHERS EVOLUTION
Source: Company presentation
5. potential access to new markets in order to: - obtain research studies from non-European customers - explore opportunities for new applications.
High Backlog Guaranteeing Long-Term Visibility
AVIO's order intake is fairly erratic because it relies on few large orders: the Ariane/Vega launches are acquired in batches by Arianespace, typically covering a time-frame of 3 years; ESA funding usually awarded every two years (i.e. research studies strictly connected to the technological development programmes)
27 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
SWOT ANALYSIS
Strengths/opportunities Weaknesse
Oligopolistic market with high Smaller size and no diversification compared technological entry barriers to much larger competitors Key role in the European Space launcher Erratic orders intake and thus not easy to sector predict down payments European launchers high reliability (both Access to only one spaceport in French Ariane 5 and Vega) Guiana (also exposed to the social crisis Vega proven multi-payload and multi-orbit risk) ability Past few years relevant non-recurring costs Growing market particularly for LEO Smaller public budgets to finance new High visibility supported by the high development projects backlog destined to grow further European countries public funding for common programmes Huge tax-credits
Opportunities Threats
New launchers currently under Flights failure causing costs, delays and development (Ariane 6, Vega-C and Vega-E) worsened reliability AVIO’s new first stage solid propellant engine Public spending budget constraint P120C to be used for both new Ariane 6 and Aggressive pricing strategy from some Vega C/Vega E from 2019 competitor AVIO’s new methane oxygen engine M10 Competition from Chinese CZ6 (although engine to replace AVUM upper stage limited to a portion of the accessible market) (produced by a third party) from 2024 Long-term technological innovations (multi Planned increase in the number of payload/multi-orbit and smaller satellite launches with heavier payload size) which could reduce launchers demand Insourcing/acquisition of critical industrial SpaceX’s reusable rocket technology supplies to consolidate margins and reduce Social/political problems in French Guiana dependency on external suppliers leveraging on the strong financial structure New markets access
28 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
P&L 2016 2017 2018 2019E 2020E 2021E Net revenues 292.0 343.8 388.7 398.5 406.0 419.0 Growth 13% 18% 13% 3% 2% 3% Gross revenues 339.7 385.2 439.7 449.5 406.0 419.0 Growth 22% 13% 14% 2% -10% 3% Total opex -265.1 -304.6 -346.1 -355.0 -359.1 -370.0 Growth 16% 15% 14% 3% 1% 3% Margin -90.8% -88.6% -89.1% -89.1% -88.5% -88.3% Adjusted EBITDA 36.5 46.5 47.3 46.5 49.4 50.0 Growth 3% 27% 2% -2% 6% 1% Adj. EBITDA margin 12.5% 13.5% 12.2% 11.7% 12.2% 11.9% EBITDA 26.9 39.2 42.6 43.5 46.9 49.0 Growth -3% 46% 8% 2% 8% 5% EBITDA margin 9.2% 11.4% 10.9% 10.9% 11.6% 11.7% Depreciation&amortization -13.7 -14.2 -14.0 -15.5 -17.0 -17.5 Provisions na na na na na na Depreciation&provision -13.7 -14.2 -14.0 -15.5 -17.0 -17.5 Adjusted EBIT 26.9 32.3 33.2 31.0 32.4 32.5 Growth 21% 20% 3% -7% 4% 0% Adj. EBIT margin 9.2% 9.4% 8.5% 7.8% 8.0% 7.8% Non-recurring costs -13.7 -7.2 -4.7 -3.0 -2.5 -1.0 EBIT 13.2 25.0 28.5 28.0 29.9 31.5 Growth 26% 89% 14% -2% 7% 5% EBIT margin 4.5% 7.3% 7.3% 7.0% 7.4% 7.5% Net financial profit/Expenses -6.9 -3.6 -0.7 -0.5 -0.4 -0.3 Other financial profit/Exp 0.0 0.0 0.0 0.0 0.0 0.0 Total financial expenses -6.9 -3.6 -0.7 -0.5 -0.4 -0.3 Non recurring pre tax 0.0 0.0 0.0 0.0 0.0 0.0 Profit before tax 6.3 21.5 27.9 27.5 29.5 31.2 Growth 43% 243% 30% -1% 7% 6% Taxes -3.1 0.3 -2.0 -1.5 -1.7 -1.8 Tax rate 50% -2% 7% 5% 6% 6% Minoritiy interests -1.8 -3.6 -1.5 -1.5 -1.5 -1.6 Non recurring post tax na na na na na na Net income 1.3 18.2 24.3 24.5 26.3 27.8 Growth -71% 1260% 34% 1% 7% 6% Net income margin 0.5% 5.3% 6.3% 6.2% 6.5% 6.6% Adj. net income 13.4 21.8 26.9 27.4 28.4 28.5 Growth -31% 63% 23% 2% 3% 0% Adj. net income margin 4.6% 6.3% 6.9% 6.9% 7.0% 6.8%
CF Statement 2016 2017 2018 2019E 2020E 2021E Cash Flow from Operations 17.0 36.0 39.8 41.6 44.8 46.9 (Increase) decrease in OWC 6.9 46.2 3.7 1.8 -5.5 -2.4 (Purchase of fixed assets) -24.5 -28.6 -22.9 -35.0 -33.0 -27.0 (Other net investments) 0.0 67.0 0.2 -3.5 0.0 0.0 (Distribution of dividends) -1.6 0.0 -10.0 -11.6 -11.6 -11.6 Rights issue 0.0 0.2 0.0 0.0 0.0 0.0 Other 11.2 -60.5 -3.3 -2.0 -2.0 -2.0 (Increase) Decrease in Net Debt 9.0 60.3 7.4 -8.7 -7.3 3.9 Source: Equita SIM estimates and company data
29 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT
AVIO | June 5, 2019
INFORMATION PURSUANT TO EU REGULATION 2016/958 supplementing Regulation EU 596/2014 (c.d. MAR)
This publication has been prepared by Martino De Ambroggi as a financial analyst on behalf of EQUITA SIM SpA (licensed to practice by CONSOB resolution no. 11761 of December 22nd 1998 and registered as no. 67 in the Italian central register of investment service companies and financial intermediaries) to which he is bound by an employment contract.
In the past EQUITA SIM has published studies on AVIO
EQUITA SIM is distributing this publication via e-mail to more than 700 qualified operators today: Wednesday, 05 June 2019 at 8:59 AM
The prices of the financial instruments shown in the report are the reference prices posted on the day before publication of the same.
EQUITA SIM intends to provide continuous coverage of the financial instrument forming the subject of the present publication, with a semi-annual frequency and, in any case, with a frequency consistent with the timing of the issuer’s periodical financial reporting and of any exceptional event occurring in the issuer’s sphere of activity. The information contained in this publication is based on sources believed to be reliable. Although EQUITA SIM makes every reasonable endeavour to obtain information from sources that it deems to be reliable, it accepts no responsibility or liability as to the completeness, accuracy or exactitude of such information. If there are doubts in this respect, EQUITA SIM clearly highlights this circumstance. The most important sources of information used are the issuer’s public corporate documentation (such as, for example, annual and interim reports, press releases, and presentations) besides information made available by financial service companies (such as, for example, Bloomberg and Reuters) and domestic and international business publications. It is EQUITA SIM’s practice to submit a pre- publication draft of its reports for review to the Investor Relations Department of the issuer forming the subject of the report, solely for the purpose of correcting any inadvertent material inaccuracies. This note has been submitted to the issuer. The recommendation was produced using proprietary Excel models that are stored on company servers. The models are backed up at the end of each month. EQUITA SIM has adopted internal procedures able to assure the independence of its financial analysts and that establish appropriate rules of conduct for them.
Furthermore, it is pointed out that EQUITA SIM SpA is an intermediary licensed to provide all investment services as per Italian Legislative Decree no. 58/1998. Given this, EQUITA SIM might hold positions in and execute transactions concerning the financial instruments covered by the present publication, or could provide, or wish to provide, investment and/or related services to the issuers of the financial instruments covered by this publication. Consequently, it might have a potential conflict of interest concerning the issuers, financial issuers and transactions forming the subject of the present publication.
Equita SIM S.p.A. provides or has provided in the last 12 months investment banking services for Avio S.p.A. Equita SIM S.p.A. provides or has provided in the last 12 months corporate finance services to Banca Monte dei Paschi di Siena SPA or to a company of the same group Equita SIM S.p.A. performs the role of Market Maker for financial instruments whose underlying assets are shares issued by Banca Monte dei Paschi di Siena SPA Equita SIM S.p.A. performs the role of Market Maker for financial instruments issued by Banca Monte dei Paschi di Siena SPA Equita SIM S.p.A. performs the role of Market Maker for financial instruments whose underlying assets are shares issued by Enel S.p.A. Equita SIM S.p.A. performs the role of Market Maker for financial instruments whose underlying assets are shares issued by ENI S.p.A. Equita SIM S.p.A. performs the role of Market Maker for financial instruments issued by Finmeccanica Finance SA Equita SIM S.p.A. performs the role of Market Maker for financial instruments whose underlying assets are shares issued by Leonardo S.p.a. Equita SIM S.p.A. performs the role of Market Maker for financial instruments issued by Leonardo S.p.a. A direct or indirect shareholder is a member of Board of Directors of Leonardo S.p.a. Equita SIM S.p.A. performs the role of Market Maker for financial instruments whose underlying assets are shares issued by SNAM S.p.A. Equita SIM S.p.A. performs the role of Market Maker for financial instruments whose underlying assets are shares issued by STMicroelectronics NV
In addition, it is also pointed out that, within the constraints of current internal procedures, EQUITA SIM’s directors, employees and/or outside professionals might hold long or short positions in the financial instruments covered by this publication and buy or sell them at any time, both on their own account and that of third parties. Research Division management alone determines the remuneration of the analysts who produced the publication, and their remuneration is not linked to Equita SIM’s Investment Banking transactions. It is linked to Equita SIM’s total revenue, which includes the revenue of the Investment Banking and Sales & Trading Divisions. For more details on the policies and principles designed to ensure the integrity and independence of Equita SIM analysts, please refer to the policy on organizational mechanisms of the Research activity available at www.equita.eu on the “Legal notices” section.
The recommendations to BUY, HOLD and REDUCE are based on Expected Total Return (ETR – expected absolute performance in the next 12 months inclusive of the dividend paid out by the stock’s issuer) and on the degree of risk associated with the stock, as per the matrix shown in the table. The level of risk is based on the stock’s liquidity and volatility and on the analyst’s opinion of the business model of the company being analysed. Due to fluctuations of the stock, the ETR might temporarily fall outside the ranges shown in the table.
EXPECTED TOTAL RETURN FOR THE VARIOUS CATEGORIES OF RECOMMENDATION AND RISK PROFILE
RECOMMENDATION/RATING Low Risk Medium Risk High Risk BUY ETR >= 10% ETR >= 15% ETR >= 20% HOLD -5% 30 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT AVIO | June 5, 2019 The methods preferred by EQUITA SIM to evaluate and set a value on the stocks forming the subject of the publication, and therefore the Expected Total Return in 12 months, are those most commonly used in market practice, i.e. multiples comparison (comparison with market ratios, e.g. P/E, EV/EBITDA, and others, expressed by stocks belonging to the same or similar sectors), or classical financial methods such as discounted cash flow (DCF) models, or others based on similar concepts. For financial stocks, EQUITA SIM also uses valuation methods based on comparison of ROE (ROEV – return on embedded value – in the case of insurance companies), cost of capital and P/BV (P/EV – ratio of price to embedded value – in the case of insurance companies). MOST RECENT CHANGES IN RECOMMENDATION AND/OR IN TARGET PRICE (OLD ONES IN BRACKETS): Date Rec. Target Price (€) Risk Comment nil DISCLAIMER The purpose of this publication is merely to provide information that is up to date and as accurate as possible. The publication does not represent to be, nor can it be construed as being, an offer or solicitation to buy, subscribe or sell financial products or instruments, or to execute any operation whatsoever concerning such products or instruments. EQUITA SIM does not guarantee any specific result as regards the information contained in the present publication, and accepts no responsibility or liability for the outcome of the transactions recommended therein or for the results produced by such transactions. Each and every investment/divestiture decision is the sole responsibility of the party receiving the advice and recommendations, who is free to decide whether or not to implement them. Therefore, EQUITA SIM and/or the author of the present publication cannot in any way be held liable for any losses, damage or lower earnings that the party using the publication might suffer following execution of transactions on the basis of the information and/or recommendations contained therein. The estimates and opinions expressed in the publication may be subject to change without notice. EQUITY RATING DISPERSION AS OF MARCH 31, 2019 (art. 6, par. 3 Delegated Regulation (EU) 2016/958 of 09 March 2016) COMPANIES COVERED WITH BANKING COMPANIES COVERED RELATIONSHIP BUY 37.1% 48.6% HOLD 58.9% 50.0% REDUCE 3.4% 0.0% NOT RATED 0.6% 1.4% The list of all conflicts of interest, rating dispersion, last 12 months recommendation made by Equita SIM’s analysts and other important legal disclaimers are available on www.equita.eu in the “Legal notices” section. This document has been provided to you solely for informational purposes and may not be reproduced or distributed, directly or indirectly, to any other person, nor may it be published, wholly or in part, for any reason, without EQUITA SIM’s specific authorisation. By accepting this document, you agree to comply with the limitations indicated above. 31 IMPORTANT DISCLOSURES APPEAR AT THE BACK OF THIS REPORT