The first of two short commentary pieces this morning on important UK based engineering and manufacturing companies that have today reported 2017 results:

With a strategy over the past year of making further progress in operational improvement priorities that underpin medium term targets for cash and margin improvement, the FY17 results from Meggitt demonstrate that this extremely interesting company remains absolutely on course to provide further organic and efficiency improvements in the current year.

Announcing a 34% increase in pre-tax profits for FY17 and that are bang in line with expectations, Meggitt CEO, Tony Wood emphasised that he sees further growth occurring in the current year. That is pleasing enough and with the general outlook for the aerospace and defence industries good and looking to get even stronger over the next two years, the company looks very well placed to me as it moves to achieve its efficiency targets.

With organic based order growth up 6% last year, I would suggest that apart from energy sector activities being somewhat flat, there seems little in these results to disappoint. As if to back up its confidence in achieving even better performance, note that Meggitt has raised the final dividend to 10.80 pence a share from 10.30 pence – this brings the full-year dividend up to 15.85 pence from a previous year 15.10 pence.

For the record, on £2.03 billion of revenue in 2017, up from £1.99 billion in 2016, Meggitt produced statutory profits of £262.4 million pounds compared to £195.5 million a year earlier. Net debt declined by 18% to £964.8 million during the year and it is pleasing to see that the company also generated a 42% increase in free cash flow to £186 million during the year. A good overall set of results then but this is not as good as it gets for Meggitt and it is very clear that CEO, Tony Wood believes there is further room for improvement. Investors would do well to take note.

In respect of improving efficiency and scale of its operations Meggitt has been focusing on inventory reduction together with establishing a more centralised approach to purchasing across the group. Site rationalisation plans are also important and the plan to consolidate a range of engineering manufacturing and support operations into a new site at Ansty Park near Coventry will be important from the aspects of both capacity, scale and improving efficiency of operation further. There has also been a focus on portfolio reduction with the sale of four none-core businesses having been completed in the past 14 months with one further disposal expected to be completed next month.

In the annual statement accompanying results Tony Wood says that he anticipates revenue will grow 2% to 4% this year and that operating margin will improve – the company expects to deliver a margin improvement of at least 200 basis points by 2021.

For those who may not know this interesting FTSE 250 quoted company, Meggitt designs and manufactures high performance precision components and sub-systems predominantly for the aerospace, defense and energy markets but also for medical, industrial, test, and auto markets. The company has its headquarters in Bournemouth with subsidiary operations stretching through the UK, Continental Europe, and USA together with other locations internationally. A significant player in the aerospace industry, the range of divisional operations includes Meggitt Aircraft Braking Systems, Meggitt Control Systems, Meggitt Polymers & Composites, Meggitt Sensing Systems and Meggitt Equipment Group divisions. Of these and to highlight one that is perhaps best known, Meggitt Aircraft Braking Systems provides anti-skid, auto braking, brake-by-wire, integrated brake metering/anti-skid brake control systems, carbon, rotor, electrically-actuated and steel braking, integrated tire pressure indicator systems/brake temperature monitoring systems, landing gear computers, park/emergency valves, auto spoiler deployment plus other braking system hydraulic components, main and nose wheels for commercial and military aircraft and tire pressure monitoring systems.

CHW (London – 27th February 2018)

Howard Wheeldon FRAeS

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

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