PARIS (Reuters) - France’s Safran (SAF.PA) raised full-year forecasts as it reported stronger than expected first-half profits, sending shares in the world’s second-largest aerospace supplier sharply higher on Thursday.
The maker of aircraft engines and components such as landing gear said first-half recurring operating income rose 36% to 1.883 billion euros on revenues up 27% to 12.102 billion, reflecting higher margins across three reorganized divisions.
Safran, which co-produces engines for Boeing’s 737 grounded MAX jetliner, said it now expects revenue to grow around 15% in 2019 compared with a previous forecast of 7-9%. It sees underlying revenue growth at 10%, twice the previously targeted rate, based on its assumptions of engine deliveries to Boeing.
In early trading, shares were up almost 8% despite continued uncertainty surrounding the length of the 737 MAX’s grounding. Demand for commercial aircraft and services remains strong.
Global regulators grounded Boeing’s fastest-selling jet in March following two fatal crashes.
Safran co-owns CFM International, the world’s largest jet engine manufacturer based on the number of units sold, together with General Electric (GE.N). CFM engines power the Boeing 737 and about half of the competing Airbus (AIR.PA) A320 fleet.
CFM receives a share of deposits paid to Boeing by airlines and then a share of final payments made when a jet is delivered, so the grounding is weighing on cash generated by both firms - even though both are still producing at a high rate.
Safran revised up the quarterly cash impact of the grounding crisis by 50% to 300 million euros from June 30, when the refusal of airlines to keep paying deposits on grounded planes began to bite. Previously it had been hit only by the shortfall in final payments for aircraft on the production line and for which deposits had been received before the March grounding.
Based on an assumption that the 737 MAX returns to service in the fourth quarter, Safran now expects its free cashflow to represent 50-55% of recurring operating income compared with a previous target of 55%. If the grounding lasts until the end of the year, the rate of cash conversion could dip below 50%.
Industry sources say many airlines have halted any payments related to the 737 MAX, pending settlements on compensation for the delays which have not yet been paid out by the planemaker.
Safran says cash generated by CFM’s new LEAP engine is split about evenly between advance payments and final payments.
It predicted any cash shortfalls would be reversed gradually once the MAX is flying, which Boeing expects later this year subject to approvals for new software and training. That process has been progressively delayed as investigations continue.
Safran’s widely watched civil aftermarket, which involves the sale of parts and repairs throughout the life of a commercial jet engine, grew 10.2% in dollar terms, unchanged from the first quarter.
Safran said its board had kickstarted the process of finding a successor to Chief Executive Philippe Petitcolin, 66, who had been due to retire next May. Petitcolin’s term has been extended to end-2020 “in order to favor a smooth transition,” Safran said.
Petitcolin has overhauled the partially state-owned engine maker and defense firm by selling some security activities and taking over seats maker Zodiac Aerospace. Safran’s shares have doubled to 131.3 euros since he took the post in April 2015.
Editing by Deepa Babington