Motor Sich is the only Ukrainian company and one of the world’s largest companies engaged in the development, production, testing and repair of modern aviation engines. The main driver of the company’s net revenue growth is the expected significant increase in helicopter and aircraft production in Russia, as well as the growth in demand for this equipment in other developing countries with which Russia has historically maintained close relationships. Despite Russian authorities’ announcement about starting-up the serial production of helicopter and missile engines in Russian plants, we are skeptical about the timely realization of these plans. We see the most probable and advantageous way for both parties is close cooperation in engine production.
MSICH’s penetration in the CIS region is dramatically high – almost 90% of mid-weight to heavy helicopters and 60% of aircrafts in use in the region are equipped with Motor Sich engines. Such a market penetration and the 100-year history of the company confirm the high quality of its products. Moreover, high entry barriers to the market and the company’s strong collaboration with Russian enterprises provide MSICH with an exclusive position in such sectors as helicopter and missile engines on the Russian market.
The core company revenue generators are new engines sales – accounting for 56% of net revenue based on 2007 results. In our model we estimate the company’s output growth for helicopter engines at 6% CAGR during the period 2008-2012. Combined with price increases, we expect revenue from helicopter engine deliveries will grow 12% CAGR during this period. As for aircraft engines, we see the highest prospects with D-436 and АI-222-25, АI-25TLSH engines in the short- to mid-term.
We conservatively estimate the net revenue growth of MSICH at 14% CAGR for 2008-2012 and 5% CAGR for 2013-2017. Also, reflecting the current growth in the cost of debt, as well as the increase in the return on investment capital requested by shareholders, results in WACC of 20% for this year, which decreases slightly to 12% in 2012 due to the anticipated stabilization of the situation.
We expect weak financial results in 2008 due to the growth in prices for raw materials and an increase in administrative expenses this year. Thus, the EBITDA margin is estimated to decline to 14.4% in 2008, compared to the peak 22.8% last year. It is then expected to smoothly recover to 17%.
Recommendation. Our DCF model is based on a three-fold method that equally takes into account perpetuity growth rate, exit EBITDA and P/E multiples. The DCF method valued MSICH at USD 234.4 per share, while the Comparative method resulted in a value of USD 107.1 per share. The average of these two mentioned methods results in a USD 182.9 as a fair value per share, with a 363% upside potential. We reiterate our BUYing recommendation.
1. Executive summary
3. Organizational structure
4. Sales structure
5. Motor Sich prospects
6. Helicopters and helicopter engines market
7. Aircrafts and aircraft engines market
8. Missiles engines market and land equipment sector
9. SWOT analysis and Risks
Список таблиц, диаграмм, графиков:
1. Key indicators
2. Motor Sich production assets and their main functions
3. Revenue structure by type of products, USD mln
4. Revenue structure by type of service, 2007
5. Revenue structure by region, 2007
6. Turbine-powered helicopters production and the value of engines production and support in the world
7.Turbine engines production by power, number of units
8.Turbine engines sales by power, USD mln
9. Helicopter demand by weight, %
10.Mi and Ka helicopters in the world, %
11.Russian helicopters distribution by age, units
12. Helicopters engines by type
13.Core engine repair market players in 2006, %
14.Aircraft deliveries by region over 2007-2026, %
15.Engine deliveries by airplane size over period 2007-2026
16.Aircraft deliveries by size over 2007-2026 period, units
17.Import of foreign airplanes to Russia, units
18.Motor Sich aircraft engines portfolio
19.Valuation by DCF and Comparative methods
25.Statement of Cash Flows*