Jean-Pascal Rolandez of The L.T. Funds presented his in-depth investment thesis on Saab (Sweden: SAAB-B) at European Investing Summit 2019.
Thesis summary by Jean-Pascal:
Saab, originally Svenska Aeroplan AB, was founded just before World War II for the specific purpose of guaranteeing Sweden’s supply of high-tech defence equipment. The company focused then on aircraft manufacturing, diversifying in the late 40’s in in cars and in the late 50s in the computer business. In 1968, Saab merged with the Swedish truck company Scania, becoming Saab-Scania. In 1990, Investor AB carried out an LBO on SAAB Scania, which was subsequently delisted. In 1995, Saab-Scania was divided in two independent companies, demerging into Scania and Saab. In 1995, SAAB Military Aircraft and British Aerospace formed a JV Saab-BAe Gripen to support internationally this new fighter aircraft. BAe bought a 35% stake into Saab, holding it until 2010. In 1999, Saab acquired the missile business of Bofors and in 2006 the radar business of Ericsson. In 2014, Saab acquired Kockum from Thyssen, widening its offer to the marine area as Kockum develops, builds and maintain submarines and surface ships.
With 2019(e) sales of SEK136Bn and over 17,000 employees, Saab‘s products and services are sold to over 100 countries and the company operates in 35 countries. While Sweden accounts for 41% of sales, 71% of the order book originates from abroad. Saab is either the main supplier of platforms and systems directly to the end customer or is a subcontractor of subsystems and components. 85% of sales relate to defence related products and services.
Aeronautics (23% of sales) offers airborne systems, related subsystems, unmanned aerial systems (UAS) and aero-structures. Dynamics (21% of sales) offers ground combat weapons, missile systems, torpedoes, sensor systems, remotely operated vehicles for armed forces as well as civil security applications. Surveillance (21%) focuses on airborne surveillance solutions, radar (air, ground and naval based) and electronic warfare. Industrial Products and services (15%) include avionic systems and traffic management: it focuses on private customers. Support services (16%) offer maintenance, integrated support solutions, logistics and regional aircraft maintenance.
Over the last 20 years, geopolitical turmoil in the world has led many countries to reassess their defence capabilities, both nationally and multilaterally. Since 2000, worldwide defence expenditures have increased 3% p.a.. 36% of the global defence market is in Northern America, Asia and Pacific (28%) and Europe (20%). By 2023, this market is expected to grow 2-3% p.a. (Source: Sipri, 2019), probably more in Europe due to US pressure on NATO to spend more.
Over the last 7 years, SAAB’s sales and EBITDA per share have grown by respectively 6.9% and 4.9%, with organic sales growth at 5.5% p.a.. A heavy investment and R&D program seems to have peaked in 2018. Thanks to a strong focus on surveillance, hand-held systems, fighter aircraft (Gripen), training aircraft (TX) and sensors & radars, we expect organic sales CAGR close to 5% by 2023, with some bolt on acquisitions allowing for a 6% sales growth p.a.
We expect a 7% EBITDA CAGR by 2023. SAAB should manage to achieve an aggregate operating cash flow close to SEK 8.0Bn. Its 7.9% 2018 ROCE slightly exceeds its 5.9% WACC. The stock is trading on 9.3 x its 2019(e) EBITDA (on line with peers) and 1.3x sales. We expect the share price to increase by 6% p.a. by 2023 in line with EBITDA. Investor AB owns 28.8%, Wallenberg Foundation 9.0% and the Kingdom of Sweden 5.9%.
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About the instructor:
Jean-Pascal Rolandez is the manager of The L.T. Funds, a Geneva-based investment firm focused on a buy and hold strategy based on a limited number of European stocks with a 5+ year investment horizon. Jean-Pascal has more than 25 years of equity investment experience and has founded the first investment club at the leading French business school ESSEC. Prior to establishing The L.T. Funds, Jean-Pascal held various executive positions at BNP Paribas for 22 years, including as Paribas’ French equity strategist.
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