EMEA-based aerospace and defence companies are likely to increase their returns to shareholders in 2013, particularly via share buybacks, according to Fitch Ratings.
“This is due to strong cash generation last year and limited growth in capex or M&A in 2013. However, this trend is likely to be balanced by a desire to preserve conservative capital structures, which should prevent payouts being so large as to harm rating profiles,” Fitch in a report said.
Stronger-than-expected cash generation by the five Fitch-rated companies that have reported 2012 results so far increased their total cash pile by around 33% to more than EUR20bn, which is likely to add to pressure from shareholders to increase returns. With cumulative debt stable at around euro 12billion, most companies also have large net cash positions above their operating or rating profile needs.
“Because of the companies’ moderate leverage and only mildly growing investment needs in the coming year, we expect share buybacks in particular will be more common than they have been in recent years. Already in 2013 BAE Systems has announced a GBP1bn three-year buyback programme, and EADS is likely to approve a buyback of 15% of its shares (up to euro3billion) later this month,” Fitch statement added.
“Other companies in the sector may follow due to the likelihood of further growth in commercial markets and the weak outlook for large scale M&A due to the uncertain defence spending environment. However, we expect they will continue to preserve conservative capital structures and balance their investment needs with that of shareholders, and so any buybacks are likely to be moderate.”
“Buoyant commercial markets and continuous focus on cost discipline resulted in all five Fitch-rated companies reporting a lift in their 2012 underlying cash flow margins. While their average revenue rise in 2012 was 9%, pre-financing funds from operations rose by an average of 10%, with the average margin in 2012 at 9.8%, up from 9.6% in 2011.”
“Strong levels of new orders, which are typically accompanied by cash advance payments, meant that overall free cash flow generation among the five companies in 2012 was relatively stable, despite a 35% rise in capex and a 22% increase in dividend payments. The cumulative backlog was up 4.6% at end-2012, to euro726billion.”
The five Fitch-rated companies that have reported their 2012 results to date are Rolls-Royce, BAE Systems, EADS NV, Thales and MTU Aero Engines.