We increase our fair value estimate for takeover target Meggitt (MGGT) to 800p from 610p as we believe there is a high probability that the 800p per-share bid by US firm Parker-Hannifin (PH) will succeed. The commitments made by Parker-Hannifin to the UK relating to the preservation of critical research and development and engineering skills should, in our view, appease any regulatory concerns. The deal is expected to close in third-quarter 2022.
Meggitt designs and manufactures high performance components and sub-systems for the aerospace, defense, and energy markets. Key products include aircraft wheels and brakes, fire and safety systems, sensors, fuel systems, and polymer seals. The FTSE company has been the target of overseas buyers, like Morrisons and Ultra Electronics this year. Because of the sensitive nature of Meggitt’s operations, the UK Government has flagged up national security concerns and officials have been in discussion with the US firm’s board.
Business secretary Kwasi Kwarteng, who is currently embroiled in the gas price crisis, has intervened in the takeover battle for Meggitt, seeking assurances on access to military technology in the future. Parker-Hannifin had been asked to make assurances on UK jobs, keeping the board British and continuing to supply the UK Government. US firm TransDigm pulled out of the race for Meggitt in the summer.
Looking at the share price chart for this year, if the 800p a share bid goes through, the company's value has effectively doubled since before the takeover interest.
Wide Moat Meggitt
We assign a wide moat rating to Meggitt due to the presence of intangible assets, in the form of technical know-how and long-standing customer relationships, and a high level of switching costs found in the group’s original equipment (OE) and aftermarket (AM) businesses. Meggitt enjoys broad exposure to civil and defence aerospace markets, with a high degree of sole-source positions onlong-term platforms and an installed base of more than 73,000 aircraft, which generate a recurring stream of high margin aftermarket revenue.
We believe the presence of the moat is supported by a relatively stable average historic ROIC of 18%, comfortably exceeding the group’s cost of capital. Key positions on a diverse number of growing platforms should expand the installed base and secure the group’s annuity stream of revenue for decades, supportive of a wide moat. For a more meaningful discussion on moat sources, we focus on the group’s addressable markets ratherthan reported product segments, namely: Civil Aerospace, Defense, and Energy markets.
