MTU Aero Engines is a large engine manufacturer, but what’s perhaps even more important is the company’s engine maintenance division. Whenever an aircraft’s engine breaks down, MTU is very likely one of the companies that will repair and overhaul it. The company is listed in Germany with MTX as its ticker symbol.


FY 2016 was strong for MTU

2016 was a record year for MTU as the company was able to meet all forecasted targets.

The total revenue increased to 4.73B EUR, resulting in a very impressive 13% increase in its gross profit. As all other expenditures remained in line with the previous years (there were obviously slight increases as well due to the higher revenue and sales results), the EBIT increased by almost 17% to 453M EUR. The average tax rate decreased (despite the higher pre-tax income the total tax payment remained unchanged), which allowed MTU to report a net income of 312.2M EUR attributable to its own shareholders. This works out to be 6.09 EUR per share or 43% more than the 4.26 EUR the company reported as its 2015 EPS.
Source: annual report

The cash flows (on a consolidated basis) also remain very strong. MTU generated a total operating cash flow of 358M EUR, but this includes a negative 292M impact due to changes in its working capital position. If we would adjust these results for the WC changes and the tax payments the adjusted operating cash flow would have been 693M EUR.
Source: annual report

Not only was this sufficient to cover the 270M EUR in capital expenditures, it also provided funding to cover the dividend payment and the repayment of 120M of debt (partially funded by issuing a new low-cost convertible debenture). On an adjusted basis, the total free cash flow was approximately 423M EUR.

Will this trend continue?

That’s absolutely stunning, as this compares very favorably to the 311M EUR in free cash flow in the previous year. And even though the total capex remains at a relatively high level (270M EUR per year, which is in line with the 2015 capex), we would expect the capex numbers to start to trend down.

After all, a substantial part of the 2016 capex was spent on the expansion of the MRO services portfolio, which includes the acquisition of new engines for the lease services division. That’s obviously not cheap, but an engine is an asset with a relatively long useful life, whilst the leasing income should be relatively high as well. After all, an airliner with a broken down engine will be happy to pay a higher fee to get the issue fixed immediately as lost time equals lost revenue.
Source: company presentation

Additionally, MTU Aero also completed the final assembly line for the PW1100 engine, which is used on the Airbus A320 neo. That’s also a large investment, but it’s undoubtedly one that will pay off very nicely in the near future.

R&D also is a very important part of MTU’s business strategy, and although these expenses are expensed rather than capitalized, you shouldn’t underestimate the total amount of cash used in these R&D activities. With an investment of in excess of 200M EUR per year, MTU Aero is definitely prepared for the future as it will very likely become Boeing’s main partner on the 777X version of the triple-seven wide-body aircraft.

The future looks bright for MTU, and whilst aircraft producers are risking oversupplying the market which could lead to a few years of a lower order intake, all the planes that are flying around are using their engines, which will have to be replaced and undergo maintenance anyway. And that’s what makes MTU’s business case so interesting as it services approximately 1/3rd of all airliners with components and engines.

Investment thesis

MTU Aero Engines is still attractively priced right now, with a free cash flow yield of 6.2%. However, we do expect the total capex to trend down from this year on, which should increase the free cash flows and the free cash flow yield.

MTU could be a ‘buy on weakness’ to capitalize on a growing number of aircraft flying around, and MTU will always remain one of the vital links of the supply chain.

Disclosure: the author has no position but would be interested on a pullback

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