The aerospace and defence sectors are on song, helped by strong sales to China and spending growth in the United States under President Trump. That’s good news for Meggitt, the international engineer that supplies both industries and which at its half-year results last month announced both a healthy increase in revenues and an upgrade to its guidance for growth for the rest of the year.
Indeed, thanks to a series of earnings upgrades last year that have put some serious wind underneath Meggitt’s shares, this month the group will be able to boast membership of the FTSE 100, the index of London’s leading shares that it exited unceremoniously four years ago in the wake of a profit warning.
Meggitt was founded in Halifax in 1947 as Willson Lathes, a machine tool business, changing its name and moving to Bournemouth in 1964 after an acquisition. A specialist precision engineer, it makes parts from wheels and brake systems to valves and sensors, which it supplies to some of the world’s biggest aircraft makers, including Boeing and Airbus.
It has three divisions: civil aerospace, which accounts for about 55 per cent of revenues; defence, at 35 per cent (nearly three quarters of that to America’s armed forces); and energy, responsible for the remaining 10 per cent. Energy is effectively an ancilliary business for Meggitt, set up after the company found that its heat exchange technology worked as well for the turbines used in oil and gas facilities as it did for aircraft engines.
The group as a whole employs 11,000 staff worldwide, generates more than £2 billion a year in revenue and is valued by the stock market at just over £4.9 billion. While it continues to have its headquarters in Bournemouth, next year it will move to Coventry, where it is building a super-factory that consolidates four of its British sites.
Meggitt makes about 70 per cent of its revenue from being the sole supplier of any given piece of kit. It will supply an initial part, often at a substantial discount, and then will benefit from a contract to supply spares and replacement components, a “lifetime” deal that in the case of an aircraft is between 20 and 40 years. This means that the company has been lifted by the structural growth in air traffic globally. Simply, as more people travel, the more flights there are, the more often a part is replaced.
The company also has done well as a result of the boom in new aircraft being developed by the world’s manufacturers — particularly Airbus, with its A321 mid-range commercial passenger jet, and Boeing, with its 737 Max. Thus far, Meggitt has not been materially affected by the problems that have beset the 737 Max, grounded after two fatal crashes, and if Boeing successfully gets the jet back in the air at the end of the year, that should remain the case.
Under the leadership of Tony Wood, 53, its chief executive since January last year, Meggitt has prioritised being more operationally efficient, mainly by consolidating factories, centralising procurement and better managing its stock. It aims to raise its operating margin, at present 15 per cent, to 19.9 per cent by 2021.
This engineer looks to be in robust financial health, reporting at the interim stage that it had grown revenues by 9 per cent to just under £1.1 billion and had lifted its total book of orders by 7 per cent to just under £1.2 billion.
Prospective investors could be forgiven for assuming that Meggitt’s shares — down 5p, or 0.8 per cent, to 631¾p yesterday — will be expensive. Trading for 21.2 times Berenberg’s forecasts earnings for a yield of 2.9 per cent, that doesn’t seem obviously to be the case.
Advice Buy
Why Not overly expensive for a good growth opportunity that is increasingly efficient operationally
Paragon Banking Group
It’s tempting to see Paragon Banking Group as a specialist buy-to-let mortgage lender, but there is quite a lot more to the business.
True, it was formed as a mortgage lender in 1985 as the National Home Loans Corporation and launched its first buy-to-let product, Homeloans Direct, in 1995. But although it grew quickly as a provider of finance to amateur and professional landlords, it moved to become a more diversified financial services provider in 2014 when it secured a banking licence. The company now offers savings and loans to individuals, provides finance for small and mid-sized businesses and last year bought Titlestone, a provider of finance for building residential property developments, for £48 million.
Headquartered in Solihull in the West Midlands, Paragon has no branches — its customers bank online, reducing costs — and it co-ordinates its commercial lending via a network of regional offices. The group’s total loans book stood at £12.5 billion at the end of June, at which point it had £6.1 billion of customers’ money on deposit.
Lending volumes are growing at a striking rate, up 20 per cent to £1.9 billion over the nine months to the end of June compared with the same period last year, and retail deposits also are growing by double-digit amounts. Moreover, unlike its banking sector peers, Paragon’s margin is improving as it runs off its legacy loans and replaces them with its more profitable lending business.
About 60 per cent of Paragon’s new lending is in buy-to-let, the higher perceived risks of which have put it under considerable additional regulatory scrutiny over the past three years, but it now specialises in professional investors. These buyers have an average holding period for their properties of about 17 years and an impressively low arrears rate, averaging 0.12 per cent at the end of March.
Being a UK-focused financial services business heavily exposed to the housing market going into Brexit has depressed the shares. Up 11p, or 2.4 per cent, to 462½p yesterday, the lack of a likely catalyst to push them higher makes them unappealing for a buyer, but they are a solid long-term hold.
Advice Hold
Why High-quality lender, but clouded by Brexit uncertainty
