RBC initiates coverage on Safran, sends shares up

Investing.com -- Shares of Safran (EPA:SAF) rose on Thursday after RBC Capital Markets initiated coverage on the stock with an "outperform" rating along with a price target of €240.

At 3:53 am (0753 GMT), Safran was trading 1.6% higher at €199.35.

The positive momentum around the stock is driven by a strong outlook for Safran's core businesses, particularly in aerospace propulsion and aftermarket services.

RBC Capital Markets flagged several key drivers for their rating. The brokerage mentions Safran's leadership in aircraft engines, electronics, components, and interior systems. 

Safran's joint venture with GE Aerospace in CFM International—responsible for the widely used CFM56 and LEAP engines—is a factor supporting RBC's positive outlook.

“For 2024, we model €27.4B in revenues, €4.2B in adj. EBIT and €3B in company-defined FCF, largely in line with guidance,” the analysts said.

Safran's Aerospace Propulsion segment, in particular, remains a strong performer, with the CFM56 engine continuing to provide substantial revenue and profit contribution. 

“In 2023, we estimate the CFM56 accounted for ~20% of revenues and ~60% of EBIT,” the analysts said. 

The commercial aftermarket is expected to provide an upside in the coming years. RBC estimates CFM56 shop visits will peak at around 2,550 in 2025, maintaining elevated levels through 2027. 

Airlines continue to invest in the legacy CFM56 engine as delays in new aircraft deliveries push demand for maintenance of older aircraft.

Safran's LEAP engine is expected to reach profitability in original equipment (OE) deliveries by late 2025 to early 2026. 

Although the company is currently not booking margins on LEAP services, improved confidence in profitability is expected to serve as a positive catalyst for the stock in the coming years​.

RBC also sees room for portfolio adjustments, including potential mergers and acquisitions, and the divestiture of Safran’s Aircraft Cabin business.

These moves could further enhance Safran's capital allocation strategy and provide incremental upside to shareholder returns.

RBC's price target of €240 is based on a ~22x multiple applied to Safran's 2026 free cash flow estimate of €4.7 billion.

The analysts note that Safran's shares are currently trading at a ~15% discount to GE Aerospace based on 2026 free cash flow estimates, which presents a material upside opportunity for investors​.