RBC Ratings Propel Safran Shares Higher Amid Optimistic Forecasts

Author: Logan Wright Updated: 09-12-2024 04:06 AM

RBC's Bullish Outlook on Safran

Shares of Safran (EPA: SAF) gained momentum after RBC Capital Markets initiated coverage, assigning the stock an "outperform" rating and a price target of €240. This uplift comes as investors grow optimistic about the company's prospects.

Positive Momentum in the Market

As of the early morning hours, Safran was trading approximately 1.6% higher, landing at €199.35. This positive trend is largely attributed to the strong outlook for Safran’s main business sectors, particularly aerospace propulsion and aftermarket services, which are pivotal to the company’s growth.

Key Drivers Behind the Rating

The RBC team highlighted several critical factors underpinning their favorable rating. They acknowledged Safran's distinguished position in the aerospace engine sector, including aircraft engines, electronic systems, components, and cabin interiors.

Joint Ventures and Innovations

A significant catalyst for this positive forecast includes the joint venture that Safran has with GE Aerospace under CFM International. This partnership produces the well-regarded CFM56 and LEAP engines, boosting RBC's optimism for Safran's future performance.

Financial Projections for 2024

RBC analysts laid out their financial expectations, projecting revenues of €27.4 billion for Safran, with adjusted EBIT reaching €4.2 billion. Additionally, they estimate a noteworthy free cash flow of €3 billion, all aligning well with company guidance.

Aerospace Propulsion Performance

Safran's Aerospace Propulsion segment is particularly strong, with the CFM56 engine contributing about 20% of revenue and an impressive 60% of EBIT according to analysts. The focus on enhancing maintenance and service for older aircraft is becoming increasingly pivotal as airlines navigate delays in new aircraft deliveries.

Future Upsides in Aftermarket Services

The commercial aftermarket is anticipated to reveal significant potential in the upcoming years. RBC predicts that CFM56 shop visits might peak at around 2,550 by 2025, stabilizing at elevated levels through 2027, indicating a sustained demand for maintenance services.

LEAP Engine Profitability Expectations

Looking forward, Safran's LEAP engine is expected to achieve profitability in terms of original equipment deliveries by late 2025 to early 2026. Although these services are not currently generating margins, a rise in profitability expectations could catalyze positive stock movement in the forthcoming years.

Strategic Portfolio Adjustments

RBC also foresees potential strategic adjustments to Safran's portfolio, such as mergers and acquisitions or divesting segments like the Aircraft Cabin business. Such changes could further optimize capital allocation and potentially enhance returns for shareholders.

Optimistic Valuation Outlook

With a target price of €240, RBC's valuation reflects a ~22x multiple based on Safran's projected free cash flow of €4.7 billion for 2026. The analysts pointed out that the current share price suggests a substantial opportunity for appreciation, quoting a ~15% discount to valuations of GE Aerospace based on similar free cash flow scenarios.

Frequently Asked Questions

What drove the increase in Safran's stock price?

The increase was primarily driven by RBC Capital Markets initiating coverage with an outperform rating and a positive price target.

What is Safran's projection for revenues in 2024?

RBC analysts project revenues of €27.4 billion for Safran in 2024.

How significant is the CFM56 engine to Safran's revenue?

The CFM56 engine is projected to account for about 20% of Safran's revenues and a remarkable 60% of its EBIT.

What role will the commercial aftermarket play for Safran?

The commercial aftermarket is positioned to provide substantial upside, with elevated shop visits expected in the coming years.

What is RBC's price target for Safran's stock?

RBC has set a price target of €240 for Safran, indicating substantial upside in the stock's valuation.

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