Meggitt, the FTSE 100 supplier of aircraft parts, could become a takeover target, according to City analysts.
While admitting the idea is not new, Citigroup says in a buy note that the company - which supplies flight displays and wheels to both Boeing and Airbus - still looks good value:
In our opinion strong free cash flow, a large installed base of aircraft, its position as sole source supplier of aircraft equipment on a large number of platforms and an attractive valuation could make Meggitt a potential M&A target. However, buyers of Meggitt have been making this argument for almost a decade and the company has not been acquired.
The reasons why it has remained independent so far include its high margins, leaving little scope for improvement, uncertainty over the outlook for defence spending, especially in the US, and its high valuation of more than £3bn.
But Citi says there have been signs of increased activity in the sector recently, not least an approach for Chemring from private equity group Carlyle and United Technologies purchase of US group Goodrich for $18.4bn.
With a takeover premium, Citi says Meggitt shares could worth up to 600p. In the market Meggitt has added 5.2p to 406.3p.
Alternatively Meggitt itself could be on the takeover trail, said Citi:
Whilst Meggitt has not explicitly stated that it is looking to make acquisitions, historically, it has made a large acquisition every three to four years, the last being Pacific Scientific Aerospace for $685m (from industrial conglomerate Danaher) announced in January 2011.
We calculate.... a £100m acquisition would be broadly 1% earnings per share accretive and that a £500m acquisition would be 4%-7% earnings accretive.
Even without bid speculation Citi says Meggitt has good growth prospects, and it has raised its recommendation from neutral to buy.
