Questor share tip: Meggitt a hold but one to watch

Meggitt
501p +17p
Questor says HOLD

Aerospace and defence engineer Meggitt has announced that City grandee Sir Nigel Rudd is to be the company’s next chairman, taking over in April from Sir Colin Terry who will have done a decade with the business.

Although Sir Nigel, who also chairs Heathrow’s parent company and aircraft services group BBA Aviation, has built up a reputation for selling off companies he has headed, don’t expect the appointment to mean Meggitt will be stick up a “For Sale” sign any time soon.

Instead, Sir Nigel is a man with exceptional knowledge of the aviation sector – he’s also a former non-exec at BAE Systems – and a safe pair of hands for Bournemouth-based Meggitt, which built itself up around designing and manufacturing landing gear for aircraft.

Meggitt is already a well-run business but in the face of declining spending by governments on their militaries, any insight the company can add is welcome.

The company’s shares took at dive at the interims in August when Meggitt revealed the defence side of its business was weakening, and that on a reported basis revenues were down 11pc at £719m and pre-tax profits were 21pc lower. However, orders crept up 1pc and the pound’s strength over the period also had a negative impact on the statutory results.

The shares have since pretty much recovered from the slump the half-year results triggered and the falling price of oil – and with it jet fuel – could be one of the factors behind this. Quite simply, cheap jet fuel means more airliners flying, increasing demand for the company’s products.

And it’s not just new jets that need these parts. Aircraft manufacturers have big order backlogs, meaning that airlines could well start looking at using older jets, rather than cannabalising them for spares, increasing aftermarket demand for Meggitt’s products as parts wear out.

Meggitt shares are trading on a price-earnings ratio 15.3, falling to 13.8 next year, pretty much on a par with peers Cobham and Senior, meaning they look to be fairly valued. The dividend yield for full-year 2014 is estimated to be 2.7pc, compared with 3.3pc for Cobham and 2pc for Senior.

Of the 22 analysts monitored by Bloomberg who cover Meggitt, 12 say “hold”, six “buy” and four “sell”.

Despite the potentially positive impact of the lower oil price on airliner usage and any speculation around what Sir Nigel’s appointment might mean, Questor sees no reason to change the rating given in May. Cuts in defence spending may by slowing but there’s too still much uncertainty.

Meggitt’s definitely one to watch, but hold for now.