Meggitt prepares share buyback programme to prop up growth agenda

AEROSPACE group Meggitt, which has operations in Birmingham and Coventry, has seen third quarter organic revenue growth of 5% to keep the business on target to meet full year expectations.

However, the total reported revenue in Q3 declined by 2%, with the organic growth being more than offset by the net adverse impact of foreign exchange translation, acquisitions and disposals. Organic growth is also predicted to wane during Q4.

The group, which also supplies the defence and energy markets, said growth had been strongest in civil original equipment, which was up 18%. It said it had also benefited from the expected continuing recovery in civil aftermarket, resulting in 4% growth.

Encouragingly, it said it had also seen a return to growth in its military markets, which were up 5% over the period. This in part, helped to offset a 7% decline in energy – mainly due to a deferral of revenue into 2015.

The group said it anticipated further improvement in the civil aftermarket for the remainder of the year, although the very strong rate of growth seen in civil original equipment in the third quarter is expected to moderate.  

“We have seen good progress in military since the first-half results, with the level of arrears related to the lack of availability of US government inspectors declining,” it said.

“However, the issue is not yet fully resolved and we do not anticipate any further catch-up in the fourth quarter.  In energy, we do not yet have full clarity on the impact of the financial difficulties being experienced by our Brazilian local content provider, but based on current projections we assume a further $10m of revenue will be delayed from 2014 into 2015.

“As a result of the above, the 5% organic growth rate seen in the third quarter is expected to moderate in the final quarter.”  

Based on current projections, and taking into account the continued uncertainty in military markets and timing of energy contracts, the group said it expected percentage organic revenue growth in the low to mid-single digits in 2015.

Backed by strong financials, the group said its capital deployment priorities were to continue investing in order to drive organic growth and operational efficiency. It also intends growing the dividend in line with earnings and secure targeted, value-accretive acquisitions in its core markets.

“Given our strong track record of cash generation and net debt reduction even in periods of elevated organic investment, the additional financial covenant flexibility afforded by the recent refinancing and the current lack of sizeable acquisition opportunities which meet our strict investment criteria, the board believes that maintaining a normal net debt/EBITDA ratio of between 1.5x and 2.5x is appropriate, while maintaining flexibility to move outside either end of that range if appropriate,” it added.

The group will therefore begin a share buyback programme tomorrow (Thursday) with the intention of achieving a ratio at or slightly above 1.5x net debt/EBITDA by the end of 2015.  

The board said it would continue to evaluate future M&A and growth opportunities, and the potential for further capital returns, on an ongoing basis.

Consistent with introducing the buyback programme, the board has determined that a dividend reinvestment plan will be offered instead of a scrip dividend.

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