What is a Meggit, and why is it important for UK engineering shares?

<p>Shares of one of the least ‘household’-name FTSE 100 companies shaved a few points off the blue-chip index’s advance on Wednesday after warning that profits […]</p>

Shares of one of the least ‘household’-name FTSE 100 companies shaved a few points off the blue-chip index’s advance on Wednesday after warning that profits would “meaningfully” miss forecasts.

 

Too many spare parts

Meggit Plc., an aerospace & defence-focused engineering firm, is probably best-known (in the sector) for its Securaplane unit.

The business manufactures chargers for batteries used on the Boeing 787 Dreamliner fleet that was grounded in 2013, following a number of on-board fires.

(US National Transportation Board tests gave Meggitt’s charger the “all clear”.)

Meggit said on Wednesday demand for other aircraft parts it makes, like wheels, brakes and electronic systems had deteriorated.

This meant forecasts would have to be cut.

It sold fewer aircraft parts than anticipated in its third quarter.

This pressured revenues in its high-margin ‘aftermarket’ business—which probably accounts for up to 50% of profits.

Additionally, older planes being removed from service had flooded the market with alternative supplies of spare parts, the firm said, depressing prices.

It expected these factors to persist in Q4, the principle reason for its warning that operating profit would miss the average market forecast of £369m.

 

A little A&D co. re-rating

Meggit’s aerospace & defence link played badly for rivals on Wednesday.

Shares of Senior Plc., Cobham, Ultra Electronics and Chemring slid between 2.4% and 5.7%, suggesting the sector’s sell-off could continue.

Relatively small Chemring remains the highest-rated (and hence perhaps most vulnerable) in the above group in forward price/earnings terms, on 16.59 times its next fiscal year.

That compares with BAE Systems’ 11.8, Ultra with 14.22, and Meggit, the weakest on 10.83.

The FTSE 350 index averages about 15.

 

Weir too

Additionally, Meggit’s energy industry business has predictably been upended by oil price tankage.

The business supplies valves for oil and gas projects and accounted for about 10% of Meggit revenues in 2014.

Sales in the unit fell 16% in Q3.

There’s a direct read-across to other oil industry valve and pump manufacturers, notably Weir Group.

Its shares did not join the sell-off in defence-linked equipment makers on Wednesday that has pushed their index down 2.3% and 14% lower year-to-date.

But Weir stock last week fell to its lowest since 2010, losing 55% in a year.

We discussed the impact of the protracted slump in oil prices on the industry’s machine makers last month.

 

Time to reduce

The extent of Meggit stock’s tumble on Wednesday, which extended from just 1% in the morning to 20.5% by the close, suggested a degree of investor surprise.

The company had in fact reiterated forecasts predicting robust growth as recently as August, citing higher spending on military aircraft.

But on Wednesday, it said it was looking at options to cut around 300 jobs.

Aside from becoming innocently embroiled in the 2013 Dreamliner battery scare, Meggit has also hit separate US turbulence of late.

In the same year it revealed production difficulties in the US after the merger of two plants there hit trading in its 2013 third quarter.

‘Timing’ is also an issue that keeps returning for Meggit, most recently in relation to acquisitions.

The £2.84bn-market cap firm has spent £544m buying companies so far this year.

Its last purchase, announced in September, cost £340m.

‘Timing’, combined with Meggit’s ‘accident prone’ air, under CEO Stephen Young, who joined the firm in 2013, could lead downstream oil industry investors to eye it as candidate for ‘reduction’.

After Wednesday’s mini re-rating though, it no longer looks that expensive against peers.

Its leverage is also close to the industry’s moderate average.

 

 

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