Due to the Covid-19 pandemic and government lockdowns, aircraft have been grounded for many months. Although restrictions have eased and flights have resumed, airlines are still not utilising their full fleets. With that in mind, it’s not surprising that aviation stocks on the FTSE have taken a huge hit. However, with the beginning of a recovery finally in sight, I’m starting to look at interesting opportunities in the aviation industry.
One stock I like the look of is Meggitt Group (LSE:MGGT).
FTSE 250 opportunity
Meggitt Group is an engineering firm that operates in three divisions: civil aerospace, defence, and energy. Aerospace produces core components that many aircraft rely on. MGGT’s markets for aerospace include civil aircraft, helicopters, engines, and business jets. Over 50% of the group’s revenue comes from its aerospace division. Defence is the second biggest revenue generator for MGGT, with over 30% from military aircraft, vehicles, naval, and space markets.
Since the turn of the year, MGGT has lost over 55% of its share price value, primarily due to the market crash. A pre-crash high of nearly 700p per share in January is a stark contrast to its lowest point of 217p in April. We are four months on and shares can be purchased at just 277p per share. I believe there is a good opportunity to pick up cheap shares.
MGGT’s defence division is where I feel the opportunity lies. Aerospace has been most affected but I believe the aviation industry as a whole will slowly recover.
Last week, MGGT released interim results for the six months ending 30 June 2020. As expected, its aerospace division has been adversely affected while defence performed well. This offset some of the losses of aerospace and energy. Overall, group revenue was down 13%. Defence revenue grew 7% whereas aerospace saw revenue decrease by 27%, and energy was also down 6% compared to the previous year. Underlying profit was 37% lower at £102m compared to the same period last year.
Due to the economic downturn, initiatives to conserve cash meant MGGT is on track to deliver cash savings of £400 to £450m for the full year. MGGT also has a good amount of liquidity to see it through the current period with almost £900m in cash available across its revolving credit facilities (RCF). In line with many other FTSE-listed companies, MGGT decided to suspend an interim dividend to retain cash.
Here’s what I’d do now
During the economic downturn I have actively discouraged purchasing airline stocks across the FTSE because there were just too many unknowns. Now that restrictions are easing, and given pent-up demand, I’m more confident in a recovery in the aviation industry.
Meggitt Group has a good track record of profit, stability, and a burgeoning defence division. It says that its parts are fitted to “almost every jet airliner, regional aircraft and business jet in service”. This fills me with confidence for the aerospace arm of the business.
That said, I think defence will be a priority for many governments due to the pandemic and economic uncertainty. If you are looking for a contrarian buy this may well be one for you at its current rock bottom price. You may have to show patience with this one, though.
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Jabran Khan has no position in any shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.