case safran notes

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  • 7/29/2019 Case SafranNotes

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    Cas Safran :

    Explain both Consolidated AND the other !

    But use the consolidated one to analyse !

    Sales ?

    Margins (Consider EBIT)?What is the best one ? The worst one ?

    Cash Flows ?

    Capital expenditure ?

    1.

    What about operating margin ?

    Work on adjusted report

    In the adjusted SAFRAN P&L, Page 44:

    Sales=+9% (not very high)

    But organic growth rate= 6%

    Security business= 20% Fast developing ! thats why they invested in this one !

    What is capitalize production ?

    EBITDA Margin has improved.

    (EBITDA margins= EBITDA COmpared to production)

    While cost of Raw Materials and Personnel costs have decreased.

    You can see that propulsion is half of the sales and around 70% of EBIT the most

    profitable !

    Security ?

    FCF : NegativeSTAR

    Why they invest in it ?Because they want to develop in more business !

    In IFRS its compulsory to get Op Inc.

    But in IFRS you no longer have this idea of exceptional items.

    All the exceptional items, you will find them with EBITDA

    that is why very often in P&L they split in Recurrent Op Inc and Non-Recurrent Op Inc

    and the difference between the two is KIND OF some Exceptionnal items

    Defense ? What about the growth ? No growth !

    No margins !

    FCF ? Negative

    So they should sell this one !

    We can be a little bite frighten by it !

    Its necessary to do something !

    In this case it is important to explain BACKLOG ! and Revenue !

    Orders during the year = Commercial activity during the year !

    BACKLOG=Accumulated orders

    Orders, what can you read ?

    It has double !!! for what ?

    Security is increasing

    Defenseagain we hate this one

    (May be they kept it for the COST OF EQUITY They have some stake !)

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    2.

    Research and development costs are recognized as expenses , so you must find theme

    in the P&L account.

    However, internally financed development expenditures are capitalized if the entity can

    demonstrate all of the following:

    the technical feasibility of completing the intangible asset and the intention and ability(availability of technical, financial and other resources) to complete the intangible asset

    and use or sell it;

    the probability that future economic benefits will flow from the asset;

    the ability to measure reliably the expenditure attributable to the intangible asset

    during its development.

    Why is R&D depreciated on the long term period ?

    Capitalized development expenditures are stated at production cost and amortized

    using the straight-line method as from the initial delivery of the product, over a useful

    life not exceeding 20 years.

    Intangible assets are tested for impairment in accordance with the methods set out in

    Note 1.L.

    Check the impact on EBITDA !

    Where are the 1,3B ??? (huge !!!)

    In this case capitalized R&D is depreciated on a 20years period ! (but its commonly

    3years ?!)

    Because the life cycle is longer !!

    The impact on profitability is R&D analysis page 32

    Self funded RTDdifferent than FULL amount of R&D !

    In the annual Report :

    Self funded R&D= 800m

    Everytime you spend some money in innovation, the gov pay you tax credit! (121m)

    Safran invests a lot in R&D, what impact on P&L ? Clever guy !!

    Impact on cash ?

    Cash impact: 808m-121m

    3.

    What about Research and development expenses ?

    Including the portion funded by customers, the total cost of Research, Technology and

    Development (RTD) was approximately 1.3 billion in 2011, representing almost

    11% of revenue. RTD operations in France totaled around 1.1 billion, more than 85%

    of overall RTD expenditure. Over 63% of RTD expenditure is self-funded, and can be

    broken down as follows:

    Aircraft programs (including Silvercrest, LEAP, Airbus A350, A400M and Boeing787): 39%;

    Helicopter turbine engines: 7%; Security and Defence, excluding aviation: 18%; R&T: 28%;

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    Other: 8%.In 2011 : Self Funded RTD = -808m

    Cash impact+121m (Research tax Credit, gov ??)

    Capitalized expenditure= +282m

    Why ?Capitalized expenditure I take it off the P&L and put it in the fridge (intangible

    assets !)

    Why impact on profitability statement is so low ?

    Because of that !

    4.

    What about adjusted Net Profit ?

    what is the currency impact ?

    Low on adjusted !

    Cost of the debt low !

    Share in profit from associate , what is that ?

    Its Ingeniko annual net profit! because we count it with equity method !

    This firm is investing in the future, accelerating !

    Depreciation have decreased.

    Why ?

    The currency impact i slow on adjusted account (-531 in 2010 and +19 in 2011 onconsolidated account).

    The cost of the Debt is Low.

    Share in profit from associate (Cf : Equity Method)

    Net Profit Margin has improved.

    5.

    What are your explanation on investment policy ?

    CA=+9%

    Capex=+30%

    R&D=+27%

    Which business is accelerating ?

    Propulsion ?

    Aircraft ?

    Defence ?

    Security ?

    Efficiency of R&D ? YES !! Order has double !!!

    6.

    Detailed Balance Sheet in AR page 64- use rather simplified Balance Sheet page 56

    7.Net Financial Debt

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    What could be the amount of NFD ?

    =Borrowing + Interest Bearing Liabilities - Cash

    And I find the NFD = 1696m

    In the annual report, Net Debt=1B

    If you wanna go deeper :

    Cost of debt/NFD= 42/1,6 =2,5% real cost of the debt !!It is in the interest of shareholders to increase gearing !

    Be careful with goodwill !!! Risk !

    When you are a Banker you take into account Goodwill and reduce the gearing

    8.

    Be carefull with borrowing subject to specific conditions page 111

    It Explains the page 56 and 64. What are the differences ?

    This caption mainly includes repayable advances granted by the French State.

    Why such a difference ?

    Borrowing subject to specific conditions , this debt can be consider as equity (kind

    of) because the french state will always lend this money to safran !

    The french state had decided that this firm was strategic !

    9.

    2 different visions of the same balance sheet :

    Safran point of view

    And the bankers

    They consider this 600m Differently (Equity vs Debt)

    Lets take the part of the bankers, to be sure !SAFRAN Financial Structure (from bankers, thats the worse one) :

    Important amount of GoodWill and moreover increasing.

    Working Capital is Negative Strong Power

    Significative amount of Provisions

    Positive Net Financial Debt

    To check :

    -The Equity

    -The NFD

    -The provisions (Huge amount of provisions= RISK !)

    Explain chnges in WC

    Explain changes in goodwill !

    Check those Data (are they in the right range ?):

    Gearing

    NFD

    Equity

    Leverage

    NFD

    EBITDA

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    ROCE

    EBIT After Tax 2011

    Net Capital employed 2010

    ROCE

    EBIT after tax 2011Net capital employed 2011

    ROE

    Equity 2010

    Net Profit 2011

    10.

    Consolidated Statement of Cash Flows :

    Comment the changes in the cash flow statements.

    Comment the changes in FCF.

    What is this changes in cash of 631 ?

    Check in the BS in Assets.

    11.

    Check the ROCE and its components for :

    - Propulsion- Security- Defense- Equipment

    What are the differences ? Why ?You can find ROCE for all businesses ! take the average to have the one of the company !

    Where is the higher return ? (Propulsion)

    Why ?Safe, high profitability high CF, and it is expanding (++ order)!

    12.

    What are the kind of risks ?

    The level of Fixed costs ?

    The Way to Reduce it ?

    Use Subcontracting !

    Check the provisions

    13.

    Safran share price ?

    Strong and increasing. Normal its a big company!

    How to attract investors ?

    What are their dividend payment policies ?

    High visibility allow to give big dividend !

    Pay out ratio ?

    Price to book ratio ?

    Why are they so high ?In 2011, EASY, explain orders at commercial level.

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    When your orders doubled, you know that within afew years sales will increase !!

    And understand in FAR, Future expectation sales net profit !!!

    That is why we expect share price to increase !

    This is the CORE DATA IN SAFRAN !

    This firm has high visibility !

    Even if we stop orders we have sales for 4 years !!!46% of Propulsion sales

    64% ... due to contract

    High visibility !!!