Meggitt plunges after revenue warning

Global engineering company Meggitt enjoyed a fuller order book in its first half, but currency headwinds, disposals and weaker-than-expected military revenue sent the group's earnings into decline.

After reducing its full-year revenue guidance from "mid to single digit" growth to "low to single digit" growth, analysts have warned that the aerospace, defence and energy specialist's shares have now been left vulnerable to a sharp correction.

Meggitt has had an interesting year. In 2013, it seemed to be going from strength to strength, with confidence in the company rising with its share price.

But a profit warning in November sent shares crashing, and the company has not been able to regain its upward trajectory.

Tuesday's update was not welcomed by investors either, and the stock was the worst performing on the FTSE 100 (UKX) falling by over 7% to 467p.

With revenue growth in its civil aerospace business offset by the strong pound and disposals, pre-tax profit dropped 21% to £143.8 million and earnings per share plunged by 23% to 14p. However, net debt shrunk by 19% to £568.3 million and free cash flow rose by over two thirds to £20.5 million, helping boost the firm’s dividend by 8% to 4.25p.

Meggitt said it has a strong balance sheet, with net debt of £188.5 million, which is 1.3 times its current earnings before interest, tax, depreciation and amortisation. This ratio must not exceed 3.5 times.

"Meggitt has delivered a very weak set of first half 2014 earnings and reduced its full-year 2014 guidance. Even against the new reduced guidance, it has left itself a lot to do in the second half of 2014.

"On a clean EV/EBITA basis Meggitt is the most expensive stock in our European civil aerospace stock which leaves the shares vulnerable to a correction in our view," said JPMorgan Cazenove.

The broker says it is 'underweight' on the stock, which it says trades on a 2015 price/earnings ratio of 13.2 times.

Meggitt said it has been awarded a new Boeing contract, and although the group is confident it can please investors in the second half of its financial year, it warns that the headwinds experienced in this period are not about to let up any time soon.

Chief executive Stephen Young said: "Orders growth of 9%, including 17% growth in civil aftermarket orders, gives us confidence in a good second half organic revenue and margin recovery, although currency will remain a drag.

"The group made excellent progress in rolling out its operational improvement programme, and has pulled forward plans to roll out some key elements to the supply chain. Reflecting our continuing confidence in the prospects for the group, the interim dividend has been increased by 8% to 4.25p."

Meggitt's civil aerospace business, the company's most profitable division, accounts for nearly half of its group revenues, with its military business accounting for a third.

"The outlook for defence expenditure in the US, our single most important military market, remains uncertain given troop withdrawals and a lack of clarity over equipment reset plans. However, we expect an easing of the headwinds experienced in the first half resulting in a broadly flat year-on-year performance in the second half of 2014," the company said.

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