MTU Aero Engines: Strong Underlying Performance Despite GTF Engine Challenges
MTU Aero Engines has faced headwinds due to the metal powder issues with the Pratt & Whitney GTF engine. As a risk-sharing partner, the company has shouldered part of the financial burden, impacting its 2023 results and future cash flow. Despite these challenges, adjusted figures indicate promising underlying performance.
Adjusted Earnings Show Growth
MTU Aero Engines’ adjusted revenues for 2023 grew 19% to €6.3 billion, with EBIT increasing 25% to €818 million. The margin expansion was primarily driven by a lower share of the GTF in the product mix, providing a tailwind to profitability. Free cash flow grew 8% but fell short of EBIT and revenue growth due to higher taxes.
OEM and MRO Performance
The OEM segment saw revenues jump 21%, with military and commercial revenues contributing to a 26% increase in EBIT. Commercial MRO revenues grew 17%, supported by a lower share of the lower-margin GTF engine and a positive mix of other business segments.
2024 Guidance and Free Cash Flow
For 2024, MTU Aero Engines expects organic revenue growth for Military to be up to low mid-teens. Commercial OEM sales are projected to increase by low to mid-twenties due to higher production rates on various aircraft platforms. Adjusted EBIT margins of >12% are anticipated, while free cash flow guidance is less specific. The timing of customer compensations, including those related to the GTF engine issues, will likely impact cash flow performance.
MTU Aero Engines’ Role in GTF Engine Crisis
MTU Aero Engines emphasizes that it is not responsible for the metal powder issue in the GTF engine but shares in the solution. The company works closely with Pratt & Whitney to manage the situation and develop solutions to improve MRO capacity and optimize operations. Customer compensations are part of the risk-sharing arrangement.
Investment Case Remains Attractive
Despite the GTF engine challenges, MTU Aero Engines’ strong underlying performance, high demand for turbofans, and growing military business revenue make it an attractive investment. The company’s reduced dividend provides a more conservative approach given the additional cash outflows. With an analyst price target of $298, MTU Aero Engines presents potential upside of approximately 28%.
Conclusion: Navigating Pressures
MTU Aero Engines is navigating the GTF engine pressures effectively. The company’s underlying business performance remains robust, and its long-term prospects are promising. While free cash flow will be impacted in the near term due to customer compensations, the investment case remains compelling, supported by the company’s growth opportunities and competitive positioning in the aerospace industry.
