Senior plc: Positioned for growth amid aerospace and energy challenges

I am always on the lookout for new investment opportunities in the aerospace and defense industry as I believe there are significant opportunities to capitalize on favorable trends. The commercial aircraft industry currently faces aerospace supply chain challenges, but The long-term trend in air travel demand is focused on the upside, with higher production rates on the horizon, while demand for defense equipment remains high. I am delighted to expand my aerospace and defense coverage, Senior plc. Since this is my first time covering the company, I will provide a brief description of the company’s activities, followed by a discussion of the latest earnings, a risk assessment, and a price target and stock rating.

Senior plc: Aerospace, Land Vehicles and Power & Energy

Senior plc (OTCPK:SNIRF) is a UK based company with factories in UK, USA and Thailand. The company currently has a market cap of $872.4 million, so it’s definitely not a huge company. However, through its two segments, which are Aerospace and Flexonics, it serves key markets and customers.

The Aerospace segment provides components, substructures and assemblies for fluid transport and thermal management for aircraft and aero engines. The company is active on some of the most popular aircraft platforms in the commercial and defense aerospace industry, with exposure to the Airbus A220, A320, A330, A350, Boeing 737, 767, 777, 787, C-130 and F-35. Flexonics’ segments provide complex parts and systems for land vehicles as well as power and energy markets.

Senior plc presents a low margin business

H1 2024 revenue rose 7% to £501.4m due to higher sales in the Aerospace segment, partly offset by lower sales for Flexonics. The Boeing 737 MAX program accounts for 6% of the company’s revenue, so there is some pressure from the Boeing 737 MAX with lower-than-anticipated production rates, and as production growth is slower than expected, the company is adjusting its business. Continued demand for other aircraft, which has increased production rates, has helped the company boost its aerospace revenue, with the A320neo family being a big driver of growth. The defense market, accounting for 13% of the group’s revenue, saw revenue growth driven by the F-35 program, while the T-7A Red Hawk is also a platform for future growth.

Land Vehicle Systems accounted for 20% of group sales and offers opportunities for sustained growth due to stricter emissions standards and rising global GDP. However, at this time, the demand for land vehicles is somewhat normalizing, which leads to a decrease in income. Power & Energy also saw revenue decline due to inventory drawdowns, but the focus on renewable energy and nuclear power solutions, as well as continued robust demand for oil and gas solutions provide longer-term opportunities for the company.

On a 14.2% rise in aerospace revenue, adjusted profits rose 39.7% to £16.2m, driven by higher volumes and business realignment for production rates for the Boeing 737 MAX, remaining at relatively low levels compared to previous major programs. Revenue for Flexonics fell 5.9%, while profits fell 8.2% to £17.9m due to lower volume, which hurt margins. Overall, adjusted group operating profit rose 9.6% to £25.1m. This gives a margin of 5% compared to 4.8% in H1 2023.

While I like the fact that the company has exposure to a significant number of key platforms in the commercial aircraft and defense industries and will play a role in the energy transition, margins of just 5% are far from high.

What are the risks and opportunities for Senior plc?

The opportunities for Senior are quite clear, namely higher production rates on key commercial aircraft platforms, GDP driven ground vehicle demand and growth opportunities in the energy transition puzzle. At the same time, risks are also present as ground vehicle demand normalizes to lower levels and some aircraft programs, notably Boeing’s 737 MAX program, are not reaching target rates and will not for at least yet two years in a positive way. scenario.

Senior plc shares are a buy

To determine multi-year price targets, the Aerospace Forum developed a stock analysis tool that uses a combination of analyst consensus on EBITDA, cash flows and the latest balance sheet data. Each quarter, we revise those assumptions and stock target prices accordingly. In a separate blog we detailed our analysis methodology.

Shares in senior plc look attractive, offering a 31% upside with a $2.84 price target, while being significantly discounted relative to peers. EBITDA is set to grow by approximately 10% annually to $181.4 million by 2026, while free cash flow will increase from $10 million in 2023 to over $70 million by 2026, driven by demand growing in the end market, as well as acquisitions that will enhance results. If you are interested in buying Senior shares, I would not buy the OTC ticker SNIRF which lacks volumes, but opt ​​for the listing on the London Stock Exchange where it trades under the ticker SNR.

Conclusion: Senior plc has appreciable growth factors

There is currently some pressure in the Flexonics business, while the Boeing 737 MAX is putting pressure on commercial aerospace results. However, I believe the company is attractively positioned to meet demand in the commercial aircraft, defense, power and energy and ground vehicle markets. This is a combination that I believe will provide significant strength in the coming years as those markets address key topics and challenges they face today. As a result, I rate Senior shares a buy.

Editor’s Note: This article discusses one or more securities that are not traded on a major US exchange. Please be aware of the risks associated with these stocks.