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Sunday share tips: Flybe, Meggitt
Flybe is a share to avoid, said John Collingridge in the Inside the City column in the Sunday Times. The regional airline recently spiked on a takeover offer from Stobart Group and there looks likely to be, based on IAG's move for Norwegian Air Shuttle last week, plenty more consolidation to come among airlines, but the board dismissed the approach.
Since its flotation in 2010, Flybe has struggled to make money, and seen its shares dwindle to 37.4p from above 300p just after it debut. Annual results for the year to 31 March, due in the summer, forecast to show losses of around £20m. Chief executive Christine Ourmieres-Widener's strategy is to "reduce capacity to focus on profitable flying". But the company is very vulnerable to swings in the UK economy, while budget airlines like EasyJet and Ryanair are growing market share and responding aggressively to new routes, while the weak pound had resulted in higher fuel costs and recent bad weather added a £4m hit profits from lost revenues and additional costs.
The Stobart offer "was the obvious deal" but will be off the table for a few months. "Until then, expect more slow, painful progress," Collingridge writes.
Engineering group Meggitt was a buy for Midas in the Mail on Sunday. The company makes cutting-edge products, mostly for the aerospace industry, ensure aircraft are resilient, safe and do not go wrong. Components, such as wheels and brakes, valves, seals and sensors made by Meggitt are on 22,000 military aircraft. Meggit also makes fire protection systems to prevent fuel tanks from bursting into flames even if an aircraft is shot at or crash lands. Recently, one such system allowed a US military plane to reach home from the Middle East with 22 bullet holes in the engine. The US is the company's number one military customer, with clients including Boeing and Hornet fighter jet maker McDonnell Douglas. Other customers include Airbus and Bombardier. Roughly a third of the company's revenue comes from the defence industry but another 55% comes from civil aerospace, and the rest from the energy sector.
As well as supplying the parts, Meggitt generally aims to win associated care and maintenance contracts to create a predictable revenue stream. Recent turbulence in the shares, sending them below 440p six months from the price reaching 526p, came as large commercial aircraft manufacturers introduce a new generation of planes, such as the A320 and the Boeing 777. While Meggitt upped research and development spending in anticipation of this shift and saw the value of parts for new planes increasing 20-250%, some teething problems have hit this new generation.
Management aim to increase profit margins and cash flow over the next three years, looking to benefit from the steady growth in global passenger numbers. Analysts forecast profits of £314m for 2018, climbing above £340m and £373m in the next two years, with a dividend of 16.3p predicted this year, rising to at least 17p for 2019.
Over at the Sunday Telegraph, Essentra was one to avoid.