CTT Systems
CTT Systems - Look past 2020, CTT is in it for the long-haul (ABG Sundal Collier)
2019-12-09 06:32
Earnings growth should continue despite lost volumes
Humidifier sales and aftermarket remain key
Double-digit, long-term earnings growth potential intact
Potential for >10% long-term EBIT CAGRWe have made an in-depth review of CTT’s long-term market potential as well as the drivers behind earnings growth in 2020, where we conclude that the sales decline in guidance and our estimates for 2020 is only a hiccup in the company’s long-term growth trend. Despite the expected sales loss in 2020e, we forecast 7% adj. EBIT growth, as higher-margin OEM sales and a higher share of aftermarket sales should offset the loss of B787 dehumidifiers after Boeing’s decision to remove them as standard equipment. In the long-term, we expect high aircraft production from Airbus and Boeing to drive 15-19% ‘19e-‘38e CAGR in accumulated long-haul aircraft deliveries. If CTT has similar humidifier penetration levels in the A350/B777X as it has in the B787, we calculate that the long-term annual EBIT growth would be above 10%. Although the initial take-rates in the A350/B777X are below those of the B787, we expect them to increase as customers have yet to make their decisions.
Long-haul cash flow potential indicates value of SEK 140-211
We believe that the good visibility that CTT’s business model provides (monopoly in its market niche and 20 years of aftermarket revenues following an initial OEM sale) is suitable for a DCF valuation. Using a scenario analysis dependent on the penetration of the long-haul aircraft fleet (mainly the A350 and B777X), we arrive at a value range of SEK 140-211. If penetration levels for the A350/B777X reach similar levels as in the B787, our value range would be SEK 188-211.
Outperforming both Medtech and Nordic tech peers
CTT is trading at c. 16x ‘20e EV/EBIT, or 25% below its own history and 20-50% below Medtech/Nordic technology peers, which we argue most closely resemble CTT in terms of operational performance. We make minor changes to estimates (20e EBIT ‘+1%), an
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