Senior plc: Ready to grow in the face of aviation and energy challenges

I am always looking for new investment opportunities in the aerospace and defense industry because I believe there are significant opportunities to capitalize on favorable trends. Currently, the commercial aircraft industry is facing challenges related to the aerospace supply chain, but The long-term trend in air travel demand is up, with the prospect of higher production rates, while demand for defence equipment remains strong. I am pleased to be expanding my coverage of the aerospace and defence industry, Senior plc. As this is my first time covering the company, I will provide a brief overview of the company’s business, followed by a discussion of the latest earnings, risk assessment and target share price and rating.

Senior plc: Aviation, Land Vehicles and Energy

Senior plc (OTCPK:SNIRF) is a UK-based company with manufacturing facilities in the UK, US and other countries. and Thailand. The company’s current market capitalization is $872.4 million, so it’s definitely not a huge company. However, through two segments, Aerospace and Flexonics, it serves key markets and customers.

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

Senior plc unveils low margin business

H1 2024 revenues increased by 7% to £501.4 million, driven by higher sales in the Aerospace segment, partially offset by lower sales from Flexonics. The Boeing 737 MAX programme accounts for 6% of the company’s revenues, so there is some pressure from lower than expected production rates for the Boeing 737 MAX, and with production growth slower than expected, the company is adjusting the business size accordingly. Continued demand for other aircraft, which have seen production rates increase, has helped the company strengthen its Aerospace revenues, with the A320neo family being a significant driver of growth. The Defence market, which accounts for 13% of group revenues, has seen revenue growth driven by the F-35 programme, while the T-7A Red Hawk is also a future growth platform.

Land Vehicle Systems accounted for 20% of group sales and offers solid growth opportunities due to tighter emission standards and growth in global GDP. However, demand for land vehicles is now normalising somewhat, leading to lower revenues. Power & Energy also saw revenues decline due to sell-offs, but a focus on renewables and nuclear power solutions, as well as continued strong demand for oil and gas solutions, provide the company with long-term opportunities.

With revenues up 14.2% in the Aerospace sector, adjusted profits rose 39.7% to £16.2m, driven by higher volumes and the business aligning with Boeing 737 MAX production rates, which remained relatively low compared to previous lead schedules. Flexonics revenues fell 5.9%, while profits fell 8.2% to £17.9m on lower volumes, which negatively impacted margins. Overall, group adjusted operating profit rose 9.6% to £25.1m. This represents a margin of 5%, compared with 4.8% in the first half of 2023.

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

What are the risks and opportunities for Senior joint-stock companies?

The opportunities for Senior are quite clear, namely higher production rates on key commercial aircraft platforms, GDP-driven demand for land vehicles and growth opportunities in the energy transition conundrum. At the same time, risks are also present, as demand for land vehicles is normalizing to lower levels and some aircraft programs, notably the Boeing 737 MAX program, are not achieving target rates and will not do so for at least another two years in a positive scenario.

Senior plc shares are worth buying

To determine multi-year price targets, Aerospace Forum has developed a stock screener that uses a combination of analyst consensus on EBITDA, cash flow, and the latest balance sheet data. We revisit these assumptions and stock price targets each quarter. I have detailed our analysis methodology in a separate blog.

Senior plc shares look attractive, offering 31% upside with a $2.84 target price, at a significant discount to its peers. EBITDA is expected to grow by around 10% per year to $181.4 million by 2026, while free cash flow is expected to increase from $10 million in 2023 to over $70 million by 2026, driven by growing end-market demand as well as acquisitions that will bolster results. If you’re interested in buying Senior shares, I wouldn’t buy the OTC ticker SNIRF, which has thin volumes, and instead opt for a listing on the London Stock Exchange, where it trades under the ticker SNR.

Conclusion: Senior plc has significant growth drivers

Flexonics’ business is currently under some pressure, as the Boeing 737 MAX puts pressure on commercial aviation results. However, I believe the company is attractively positioned to meet demand in the commercial aircraft, defense, energy, and land vehicles markets, a combination that I believe will provide significant strength in the years ahead as these markets address the key themes and challenges they face today. As a result, I rate Senior stock as a Buy.

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