Magellan Aerospace is undervalued, Paradigm Capital says

Despite the company’s travelling of a rocky road, Paradigm Capital analyst J. Marvin Wolff has a number of reasons to stay bullish about Magellan Aerospace (Magellan Aerospace Stock Quote, Chart, News TSX:MAL).

The analyst reviewed the company’s latest quarterly results in an update to clients on Friday where he kept his “Buy” rating but dropped his 12-month target from $22.00 to $16.50.

Toronto-based aerospace company Magellan is a supplier of critical components in the landing gear, engine and fuselage structural component areas of commercial and military aircraft.

The company announced its Q4 and full-year 2019 numbers last Wednesday, showing 2019 revenue up 5.1 per cent to $1.016 billion and EBITDA down 10.4 per cent to $145.2 million. For the fourth quarter, Magellan posted revenue down 3.0 per cent to $246.7 million and EBTIDA down a full 44.9 per cent to $27.9 million.

For the Q4, Magellan said in its press release on March 11 that revenues in Canada grew by 3.6 per cent year-over-year, primarily driven by increased volume for proprietary and casting products, while revenue dropped 3.3 per cent in the US due to volume decreases for single aisle aircraft and aeroengine parts, offset by higher spare sales, and European revenues dropped by a full 9.9 per cent due to lower repair and overhaul sales, volume decreases for wide-body aircraft and a forex impact.

For the quarter, MAL’s numbers came in under Wolff’s forecast, where the Q4 revenue and EPS of $247 million and $0.16 per share compared to Wolff’s estimates at $251 million and $0.40 per share. In his update, Wolff pointed to lowered margins at 13.8 per cent versus his forecast of 17.9 per cent, with management chalking the slippage up to lower volumes on certain programs and less-than-optimal production efficiencies.

As for business, MAL reported a new Boeing 737 contract win over the Q4 to supply gear to Collins Aerospace Systems, worth $53 million until 2024.

But Wolff noted that the grounding of Boeing’s Max 737 is clearly the largest variable (in terms of timing for the “ungrounding”) for the company in 2020.

Wolff said Magellan’s balance sheet looks strong and that this first half of 2020 should be the bottom for the company.

“We have adjusted our forecasts with the assumption that 737 Max production does not begin until Q3 and Boeing reaches 42 planes per month by Dec. 2020. Both Airbus and Boeing will see continued production growth through 2022, along with JSF increasing volumes. Note that the total order book is 13,000 aircraft for Airbus and Boeing,” Wolff wrote.

“Magellan Aerospace is a play on the uplift in the global commercial and military aircraft cycle. The company is positioned to benefit from the high-volume new models, including the B787 (which has the highest backlog of any new aircraft), the Airbus A350XWB and the Joint Strike Fighter (JSF) (the highest military order book). The company has been busy streamlining and improving its gross margin, which should bolster earnings on higher aircraft component volumes,” he added.

The analyst is calling for fiscal 2020 revenue and EBITDA of $857 million (down from $1,063 million) and $129 million (down from $180 million), respectively.

Wolff’s new $16.50 target represented at publication date a projected return including dividend of 140 per cent.