With civil aerospace accounting for 42% of group revenues and with the aviation sector as a whole having been absolutely devasted over the past year, FY2020 results from Senior Engineering this morning make grim reading.
These are torrid times in the commercial aerospace sector and results from Senior are near enough representative of how bad the situation has been amongst the component supply chain. Sadly, despite a handful of positive chinks for the future combined with potential benefits of restructuring actions that have also included one international disposal, cannot change a view that the hill that the company will need to climb over the next couple of years is as steep and it is also long. For all that, Senior Engineering has always been a survivor and on that score in my view, absolutely nothing has changed.
This is, as far as I am aware, the first time that I have ever written on Senior Engineering although it is a company that I had come to know quite well in my previous career as an equity analyst particularly during my Birmingham period at Albert E Sharp and for which company we acted as the company’s brokers. Much water has gone under the bridge since the days when Professor Roland Smith was Senior Engineering chairman back in the 1980’s and on that score and despite what can only be regarded as an awful set of results reported by the company this morning, suffice to say that Senior is all the better for what has transpired in the intervening years.
For those that don’t know this interesting Rickmansworth, Hertfordshire based mid-cap company, one which has grown revenue by 4x over the past twenty years and that has operations in 13 countries worldwide, Senior designs, manufactures and markets high technology components and systems for both principal global aircraft manufacturing company’s – Boeing and Airbus – together with a range of defence land systems vehicle and also for power and energy markets. Highly respected globally, Senior is another of the dwindling band of great UK based manufacturing survivors and long may that be so.
I will not dwell on the very severely C-19 impacted results for last year other than to say that having battened down the hatches and taken quick restructuring action, FY2020 results look to be about as bad as they are likely to get. On the plus side it is pleasing to note that free cash flow has remained strong and that, albeit still high when looked at against the sharp decline in shareholders’ funds, net debt has fallen to £205.9 million. Not surprisingly and quite correctly in my view for a company which has reported a sharp decline in profits, the company is not paying a dividend.
Senior expects performance for FY2021 to be broadly similar to those of last year and has in its interesting market overview in respect of aerospace, provided some interesting up to date statistics and industry forecasts of likely aircraft production and air traffic recovery assumptions. This includes current Boeing and Airbus aircraft production schedule expectation – all of which makes an interesting reference point and which due to it relevance and importance across the whole sector I repeat below:
“Overall, the International Air Transport Association (“IATA”) reported demand for air travel in 2020 fell 66% year-on-year as a result of COVID-19. Most industry commentators expect air traffic to return to 2019 levels by 2023/2024 and production rates to recover to pre-COVID-19 levels by 2024/2025 for single-aisle aircraft with wide-body expected to take longer to recover.
As demand recovers, production for new aircraft will be supported by the replacement cycle driven by the accelerated retirement of older, less efficient, aircraft. Beyond this, the drivers supporting air traffic growth over the long-term of c. 4% per annum remain in place. Senior has good content on all the newer aircraft so is well positioned to benefit from the expected medium-term market recovery.
Single-aisle aircraft production had been expected to grow in 2020. However, the sudden and prolonged reduction in air traffic led Airbus to reduce its A320 programme production rates to 40 per month in 2020.
In January 2021, Airbus announced they expect A320 production to increase to rate 43 per month in Q3 2021 and thereafter to 45 per month in Q4 2021. This compares to the pre-pandemic anticipated ramp up to rate 63 per month in 2021.
Production on Boeing’s 737 MAX was at a low level throughout 2020 and it is encouraging that the 737 MAX has now been recertified and returned to service. This enabled Boeing to resume deliveries of new aircraft, with 27 being delivered to airlines in December 2020. Boeing reported c. 426 finished 737 MAX aircraft in inventory at year-end and announced it expects production to gradually increase from its current low rate to 31 per month in early 2022, with further gradual increases corresponding to market demand. While there remains inventory in the supply chain to be utilised, with an order backlog around 3,200 aircraft, we expect this programme to be successful in the medium to long term.
As we entered 2020, the wide-body sector was facing over-capacity concerns on certain core long-haul routes. International travel has seen the biggest impact as a result of the pandemic so recovery in this sector is expected to take longer than domestic routes which are typically served by single-aisle aircraft.
Airbus announced production of the A330neo has been reduced from a build rate of 3.5 at the start of 2020 to 2 per month and A350 deliveries are now expected to equate to a build rate of around 5 per month, compared to between 9 and 10 per month that had been previously expected.
Boeing also announced production cuts to its wide-body programmes. On the 787 platform the production rate was reduced to 10 per month in the second half of 2020, down from 14 per month previously, with the company announcing a further reduction to a rate of 5 per month in March 2021. The 777/777X combined production rate is expected to reduce to 2 per month in 2021, with the latest estimate from Boeing for the first delivery of the 777X in late 2023.
In business jets, flight activity in 2020 showed this area to be somewhat more resilient than large commercial aerospace. Bombardier reported their business jet deliveries for the year were down approximately 20% year-on-year due to the pandemic compared to a decline in deliveries of over 40% in the wider large commercial aerospace market. In 2020, Bombardier recorded 35 deliveries of its Global 7500, which, in June 2020, received business aviation’s first-ever Environmental Product Declaration (EPD), a third-party verification of the aircraft’s life cycle environmental footprint. In regional jets, Airbus recently indicated its intention to increase its rate of production on the A220 programme from 4 to 5 aircraft per month from the end of Q1 2021.
However, Mitsubishi Aircraft confirmed they had suspended the development of the M100 (redesign of the stretched MRJ70) and of the rebranded Mitsubishi Aircraft SpaceJet M90, although it will continue to work on the certification documentation. In addition, Embraer have rescheduled the start of operations of the E175-E2 jet until 2023”.
Defence represents 22% of Senior Engineering revenue with activity on a variety of international programmes including both the Lockheed Martin F-35 Joint Strike Fighter and C-130J transport aircraft. The company will also be engaged on the new Boeing/Saab T7A Red Hawk trainer aircraft on which production for USAF has just begun.
Performance from Land Vehicle Systems (12% of revenue) Power and Energy (16% of revenue) and other elements of aerospace activity (8% of revenue) were all severely impacted by C-19.
CHW (London – 8th March 2021)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785