Panmure cuts Meggitt to 'sell'; expects more profit warnings

Panmure downgraded its stance on defence and aerospace engineer Meggitt to ‘sell’’ from ‘hold’ and cut its price target to 325p from 363p.

It noted the shares have recovered 15% since the profit warning last October and management has boosted the rate of investment to counter the profit decline.

However, Panmure expects further profit warnings and reckons the two main sources of expected profit growth – advanced composites and aircraft braking systems – will fall short.

The brokerage said its research has shown that exceptionally high pro-forma margins of the acquired advanced composites businesses could prove illusory, given the lack of clear differentiation and volatility in the supply chain.

“What we do know is that despite strong sales growth, profitability in the complex and secondary composite products is poor and highly volatile.

“Ultimately, there is a trade-off between low capital/low margin and high capital/high margin business. We believe that Meggitt will go down the low capital/low margin route, given the balance sheet constraints.”

In addition, competition from recycling is also impacting sole source platforms in aftermarkets.

Panmure cut its earnings per share estimate for 2016 to 30.4p from 32.6p and its 2017 EPS forecast to 30.9p from 37.2p. These new forecasts are now 8% and 14% below consensus.

At 1220 BST, Meggitt shares were down 3.4% to 389.90p.