Arnaud SEITE arnaud. seite@ ya hoo.fr 1 Airbus Group F orecasted f inancial metrics strengthen ed following 2020 sharp decli ne The Ma rch 2020 stock pr ice rebuff of more than 50% following worldwide boarders closing and national lockdowns is seen to be cor related to Airbus Group 2020 F inancial S tatement results. However, d espite 30% less revenue than 2019 , decreasing EBIT and EBITDA and a second year in a row net loss of € 1.2B ( 2019: € 1.3 B ) , forecasted profitabi lity metrics are set to be positive and increasing from 2021 onwards. The rec ent issua nce of two bonds for a total of € 6 .0 B partly offsetting the 2020 cash outflow s of € 7.6 B re inforces financial leverage and return on equity but also worsen all solvency ratios which tend to be on the distress zon e with a Z - score (E. Altman) of 0.943 and a O - s core (J. A. Ohlson) of 1.986 and therefore a theor etical 88 % probability of bankruptcy w ithin a 2 - year period for th e Company. Compared to competitors, Airbus Group solvency ratios are sligh tly worse, and slightly better than it s main competitor : Boeing Co • Revenue , EBIT and EBITDA affected by C ovi d - 19 but forecasted metrics and return rati os have not. W i th respective decrease s of 29.2 % , 138.1 % and 45.6 % and back - to - back net loss of more than € 1 .0B, t he Company has been strongly hit by the Covid - 19 from March 2020 and the worldwide boarders closing and national lockdowns , until now. Only 56 6 aircrafts have been delivered in 2020 ( 2019: 863 ) and a production adaptation plan had to be set out in April in response t o the Covid - 1 9 pandemic. On the other hand, forecaste d return back to normal number of deliveries from mid - 2021 gives a lower estim a te of € 51. 9 B in revenue , NOPAT o f € 5 22M and return on equity ranging between 19.03 % and 8.09%. 2019 Expense ratio of 13% has been mainly affected by no n - usual administrative expenses due to the final agreements reached with the French Parquet National Financi er (PNF), the U.K. Serious Fraud Office (SFO) and the U.S. Department of State (DoS). It is then unlikely to reach an expense ratio greater than the gross margin • 2020 FCF mainly worsen by payment of € 5.5B worth of Trade liabilities to suppliers The 202 0 negative Free Cash Flow of € 7,589M has been mainly impacted by the € 5,523 M Trade liabilities payment by the C ompany to suppliers in anticipation and is in line with the production adaptation plan set out in April 2020 in response to the Covid - 19 In th e past 10 years, Trade liabilities cash flows have been a positive € 778M paid by clients to Airbus Group , which put in 2020 would have given positive FCF. 2020 FCF has also been affected by cash pay ment for current other liabilities worth € 4,065 M. There is no explanation about what are those current other liabilities in the Company ’ s financial re ports but we can imagine exception al ly high floating bon ds ’ interest rates due to the Covid - 19. • The issuance of two bonds worth € 6 .0 B reinforces financial levera ge and future profitability ratios but weakens the already weak debt structure In 2020, the Company issued two bonds for a total of € 6.0B to thwart the cash outflows . These bonds have a n average coupon of 1.870 % and averag e maturi ty of 10 years. Long - ter m financing liabilities then increased by 72% to reach € 14.1B. Therefore, financial leverage doubled up and so the forecasted return ratios ( i.e., ROE mentioned above). Nevertheless, all nine solvency ratios have risen dangerously and need to be watched. • Contract liabilities remai ned despite decrease in current ones The Company ’ current payments in advance received decreased by € 1,751 M but overall increased by € 481M. That is a strong sign of quick rec overy in Airb us Group ’s revenue and I do believe tha t it will get back to normal within 5 year s Equity Research Airbus SE (AIR.PA ) Aerospace industry 1 24.41 95.35 94.33 66.29 Blue Sky sce nario Target Price Current price Gr ey Sky scenario Current price ( 2 2 - March - 202 1 ) Target price ( Dec - 2021) 12 - month Recommendation 52 - wk Range Market Cap ( millions ) Forecasted 2021 EBITDA Fore cas ted 202 1 EPS Forecasted 2021 FCF Forecasted 2021 ROE Forecasted 202 1 RNOA 5 - years daily unlevered ln Beta Stock performance vs CAC 40 Index: 0 20 40 60 80 100 120 140 160 Mar, 2019 Sep, 2019 Mar, 2020 Sep, 2020 Airbus CAC40 € 94.33 € 95.35 HOLD € 1 24.41 – 66.29 € 74 , 053 B € 3,492 – 2579M € 2.02 – 0. 86 € 5,301 – 1, 195 M 19.03 – 8. 09% 9.90 – 3.51% 1.495 Arnaud SEITE arnaud. seite@ ya hoo.fr 2 Reformulated financial statements (in € millions ) 2020 2019 2018 2017 Shares outstanding 784 782 776 774 Share price (in €) 89.78 126.35 80.17 77.95 Rev e n u e 49 912 70 478 63 707 59 022 Gross profit 5 662 1 0 505 8 787 6 873 Core EBIT 703 1 321 3 465 1 938 D&A 2 831 2 927 2 444 2 298 EBITDA 3 534 4 248 5 909 4 236 Net income - 1 169 - 1 325 3 011 2 364 EPS (in €) - 1.45 - 1.75 3.92 3.04 OA 84 866 87 895 89 564 81 078 OL 65 120 75 584 74 079 68 872 NOA 19 746 12 311 15 485 12 206 FA 25 229 26 514 25 300 28 169 FL 38 519 32 835 30 968 29 729 NFA - 13 290 - 6 321 - 5 668 - 1 560 CSE 6 456 5 990 9 817 10 646 BPS (in €) 8.22 7.64 12.66 13.75 ST Debt 3 013 1 959 1 463 2 212 LT Debt 14 082 8 189 7 463 8 984 Cash distribution 0 1 280 1 161 1 046 DPS (in €) 0.00 1.64 1.50 1.35 CAPEX 2 211 3 448 2 607 1 995 FCF - 7 589 1 076 585 2 929 P/E ratio (in €) - - 20.5 25.6 P/B ratio (in €) 10.9 16.5 6.3 5.7 anticipation € 5,523 M in t rade liabiliti es in line with the production adaptation plan set out in April 2020 in response t o the Covid - 19 pandemic NFA have been drive n by the € 6 .0B worth of bonds issued by Airbus Group in 2020 CSE remained since NOA increase and NFA decrease balanced each othe r. DPS have grown each year since 2011 from € 0.22 to € 1.6 4. On 23 March 2020, the Company has decided the withdrawal of 2019 dividend proposal with cash value of € 1.4 B in response to the Covid - 19 pandemic . Given the ongoing volatility, there has been n o divid end proposal for 2020. Since PP&E us ually d oesn ’ t vary (17.3% increase from 2011 to 2020), the Group ’ s CAPEX is mainly driven by D &A. 2020 massively negative FCF are due to the € 5,523 M Trade liabilities payment by the C ompany to suppliers in anti cipation and by cash pay ment for current other liabilities worth € 4,065 M. There is no explanation about what are those current other liabilities in the Company ’ s financial re ports but we can imagine exception al ly high floating bon ds ’ interest rates due to the Covid - 19. Cash invest ments of € 2 ,169 M have been lower than last year (2019 : € 2,677) but the second highest since 2015. Those include net purchase of PP&E, net ac quisition of subsidiaries and joint ventures and net p ayment for investments accounted f or under the equity method Statutory tax rate is computed based on 2020 Airbus Group revenue per location for the weights . Each region ’s statutory tax rate has been taken from KPMG ’s Corporate Tax Rates Table accessible online. Av e raged tax rates give an Airbus Group statutory tax rate of 22.61% Statutory tax rate Location Revenue Tax rate Weight As ia - Pacific 13 087 24.75% 26.2% Europe 20 325 19.03% 40.7% North America 8 688 26.75% 17.4% Middle East 3 123 22.50% 6.3% Latin America 983 27.36% 2.0% Other countries 3 706 23.85% 7.4% Total 49 912 22.61% The financial statements have been reformulated as follows : in the income statement, o perating items a re separated from financing items. O perating income from sales is separate d from other ope rating income. Tax is allocated to components of the statement, with no allocation to items reported on an after - tax basis The reformulated balance sheet reformats t he GAAP statement in to net operati ng assets (operating a ssets minus operating liabilities ), net financial assets (financial assets minus financial obligations), and common shareholders' equity (net operating assets plus net financial assets). Lastly, refo rmulated cash flow statement distinguishes clearly the ne t cash generated by operations fr om the flows that involve paying that cash flow out to the firm's claimants Core EBIT deeply lowered mainly due to decreas ed gross mar gin of 11.3 % (2019: 14.9%). Ex pense ratio have been quite stable since 2013 betwe en 8 % and 10 %. Gross margin has been af fected by lower deliveries and lower cost efficiency at Airbus Group. The 6 0.4% increase in NOA is driven by OL and espec ially Trade and current other liabilities d rop The Company paid to suppliers in Arnaud SEITE arnaud. seite@ ya hoo.fr 3 dangerously rose in 2020 dri ven by two main factors: the drop in revenue and the two years straight negative net income. Because those are forecast ed to increase again from 2021 onwards, it is unlikely to see Airbus Group go bankrupt in the short - term future despite its high O - score rating. However, 2021 low revenue , negative FCF and negative net income proba bility of occurring may be low but exist and those need to be watched carefully Financial ratios (in € millions except stated otherwise ) 2 020 2 019 2 018 2 017 Gross margin 11.3% 14.9% 13.8% 11.6% SG&A margin 4.3% 8.7% 3.8% 4.1% R&D margin 5.7% 4.8% 5.0% 4.8% Expense ratio 10.0% 13.5% 8.9% 8.9% Operating margin 0.5% - 1.6% 3.7% 1.5% EBITDA margi n 7.1% 6.0% 9.3% 7.2% Net profit margin - 2.3% - 1.9% 4.7% 4.0% FCF m argin - 15.2% 1.5% 0.9% 5.0% ROIC 1.0% - 9.7% 16.1% 5.5% ROCE - 0.9% 2.5% 9.4% 4.9% ROE - 18.8% - 16.8% 29.4% 33.4% ROA - 1.0% - 1.2% 2.7% 2.2% RNOA - 5.9% - 10.8% 19.4% 19.4% Current ratio 1.17 0.91 0.97 1.00 Quick ratio 56.26% 40.36% 43.76% 46.59% Cash ra tio 45.9% 31.3% 33.7% 36.7% Cash flow ratio - 10.9% 6.0% 3.8% 8.0% Defensive interval 4622 2665 3697 4754 Cash flow to CAPEX - 245.1% 108.8% 88.9% 222.8% Debt to assets 15.5% 8.9% 7.8% 10.2% Net debt to asse ts 2.1% - 2.0% - 2.7% - 1.2% Debt to equity ratio 2.65 1.69 0.91 1.05 Long - term debt ratio 68. 6 % 57. 8 % 43. 2 % 45. 8 % Interest coverage - 1.88 12.06 21.76 8.13 Interest coverage (cash ) - 12.18 6.68 0.96 10.61 Fixed - charge coverage - 0.88 13.06 22.76 9.13 Fixed - charge coverage (cash ) - 19.00 34.81 10.99 14.55 CFO to debt - 31.7% 37.0% 26.0% 39.7% Cash Flow/ Total debt - 44.4% 10.6% 6.6% 26.2% Net income/ Total assets 45.3% 61.6% 55.5% 54.0% Total debt/ Total assets 15.5% 8.9% 7.8% 10.2% Workin g capital/ Total assets 7.8% - 4.9% - 1.8% - 0.1% Total assets 110 095 114 409 114 864 109 247 Retained earnings/ Total assets 0.2% 2.0% 5.2% 4.0% EBIT/ Total assets - 0.5% 1.2% 4.4% 2.4% Market Cap / Liabiliti es 67.9% 91.1% 59.2% 61.2% Sales/ Total assets 45.3% 61.6% 55.5% 54.0% Size 392.4% 396.3% 396.7% 391.7% Total liabilities/ Total assets 94.1% 94.8% 91.5% 90.3% Current liabilities/ Current assets 85.2% 110.0% 103.5% 100.1% CFO/ Liabilities 1.4% 1.4% 5 .0% 4.5% ∆Revenue/ |Revenue N+N - 1 | - 17. 1% 5.0% 3.8% - 6.0% Z - score analy sis 0.979 1.169 1.060 1.022 Logit analysis O - score 1.986 1.424 1.258 1.273 O - score p robability of bankrupcy 88% 81% 78% 78% On the whole, profitability r atios lowered. Both gross margin and expense ratio did but operating and EBI TDA margin s slightly rose. Return r atios have been affected by the w eak EBIT, Net income and FCF in 2 020 and therefore are all negative except ROIC which uses the c ore EBIT (2020: € 703M ) and not the actual EBIT (2 020: € - 510M). Four of the six liquidity ratios increased mainly driven by t he Trade liabilities € 6,086 M dro p in the Company ’ s balance sheet. Defensive inter val measures the liqui dity available to meet CAPEX without further borrowing and essentially increase by CAPEX reduct ion. The last two are negative because of negative F CF in 2020. All nine solvency ratios d eteriora ted. Solvency stock measures all inc reased because of the issu ance of the two bonds for a total of € 6.0B and LT Debt rise of 71.9%. Solvency flow measures a ll lessened , CFO ones because o f negative CFO and Core E BIT ones because of the sharp fall in Core EBIT in 2020 Airbus Group bankruptcy behavior ratios are mitigated since FCF and Net income decreased. However, those have already been explained and there is no need to watch for bankruptcy based on those ratios which will tend to incr ease in th e short - term run. Lastly, the Company ’ s Z - score (E. Altman) of 0.943 i s said to be in the distress zone because way bellow floor limit of 1.81. This is explained by low retained earnings, EBIT, equity value compared to liabilities and the drop in r evenue Airbus Group ’s O - score (J. A. Ohlson) Arnaud SEITE arnaud. seite@ ya hoo.fr 4 cash, inventory and int angible assets compared to sales can also be taken into account. FLEV 256.5% increase in the last two years is explained by both CSE reduction and f inancia l liabilities increase. 2020 issuance of two bonds for a total of € 6 .0 B is the main driver, doubling NFO in 2020. CSE remained at € 6,456 M (2019: € 5,990M) because of increase in NOA offse tting increase in NFO. Given the assumptions from page 5, a stable NWC of 2.76% and FLEV gradually stabilizing around 100% over the years with the company paying back its € 6.0B debt, Airbus Group ROCE tends to increase to 24.44% in 2025. Net income bei ng positive from 2021 and ATO increasing over the years are the two drivers for the stable increasing ROCE. Return on Common Equity breakdown 2020 2019 2018 2017 Return on Common Equity - 23.80% - 24.07% 2 6.96% 21.70% - Return on Net Operating Assets - 5.92% - 10.76% 19.44% 19.37% - Profit Margin - 2.34% - 1.88% 4.73% 4.01% Gross margin 11.34% 14.91% 13.79% 11.64% Selling 1.44% 1.29% 1.35% 1.48% Administrative 2.85% 7.40 % 2.47% 2.65% R&D 5.73% 4.76% 5.05% 4.76% - Asset Turnover 2.53 5.72 4.11 4.84 Cash 8.36% 2.34% 2.92% 6.22% Receivables 10.28% 8.05% 9.54% 9.30% Inventory 60.91% 4 4.77% 50.06% 50.38% Intangible a ssets 32.46% 23.54% 26.25% 19.70% PPE 33.41% 24.54% 26.33% 28.14% Non - current contract/ other liabilities 39.37% 24.64% 25.57% 27.64% Current contract/ other liabilities 55.77% 47. 17% 49.47% 50.58% Provisions 41. 16% 26.84% 29.65% 27.19% - Financial Leverage 205.86% 105.53% 57.74% 14.65% - Net Borrowing Cost 2.76% 1.85% 6.42% 3.43% From 2011 to 2018, Airbus Group ’ s ROCE has been an average of 21.79% , which isn ’ t comparable with its main competitor, B oeing, which has negative equity value and is way bellow Lockheed Martin 5 - year av erage of 250.2%. Still above the industr y ’ s average of 5.0% Last two years ’ ROCE have been negative due to negative RNOA. RNOA is driven by PM and ATO. PM slightly decrease d because of r evenue drop. Actually, g ross margin ’ s drop negatively influenced the 2020 ex pense ratio decrease. ATO decreased because of revenue drop and NOA growth. As explained on page 2 , t he 6 0.4% increase in NOA is mostly driven by OL and espec ially Trade and current other liabilities drop Little -40.0% -20.0% 0.0% 20.0% 40.0% 2 016 2 017 2 018 2 019 2 020 2 021 2 022 2 023 2 024 2 025 ROCE -15.0% -5.0% 5.0% 15.0% 2 016 2 017 2 018 2 019 2 020 2 021 2 022 2 023 2 024 2 025 RNOA -3.0% -1.0% 1.0% 3.0% 5.0% 2 016 2 017 2 018 2 019 2 020 2 021 2 022 2 023 2 024 2 025 PM 0.0 2.0 4.0 6.0 2 016 2 017 2 018 2 019 2 020 2 021 2 022 2 023 2 024 2 025 ATO Arnaud SEITE arnaud. seite@ ya hoo.fr 5 From 2011 to 2019, sales gr ew at an average rate of 4.9% , which seems to be correct. I therefore issued the hypothesis of 6 % and 8% growths in 202 1 and 2022 assuming Covid - 19 pande mic to stabilize from mid - 2021. I assume a perpetual sales growth rate of 3%. Growth margin has been stable between 13 % and 14% last ten years, excepted 2016 where cost of sales ’ increase was primarily due to business grow th at Airbus Commercial Aircraft and i nventories recognized as an expense and 2020 where revenue plunged by 29.2%. Therefore, I assumed growth margin to resume to normal in the next few years, with a peak of 13.7% in 2025. Expense ratio has been de creas ing and then stabilized around between 8 % and 9% before 2019 where it peak ed because of administrativ e expenses which rose by € 3 ,643 M mainly due to the final agreements reached with the French Parquet National Financier (PNF), the U.K. Serious Fraud Office (SFO) and the U.S. Department of State (DoS). Thus, I supposed the expense ratio to stabilize betwe en 9 % and 9.4%. T he 2020 € 0.0 dividend distribution policy and the conservative forecasted revenue and core EBIT recovery got me to assume slow but constant increase in DPS from € 0.80 in 2021 to € 1.60 in 2025 ATO was slightly increasing since 2015 to 2019 and averaging 4.2%. To be conservative once again, I assumed ATO to logarithmically increasing to 4 .0 in 2025. Therefore, NOA will stabilize around € 16 B. CAPEX expenses seem to f ollow cycles of 3 - 4 years and so is CAPEX/ Sales. Thus, I supposed the cycles to go on T h e correlation between D&A/ NCA and D&A/ Sales being high (87.3% over the past ten years), I presumed that it would go on and fol lowed the sl owly upward trend for both ratio until 2025. Finally , I assumed 0.54 % and 2.02% yearly growth rate s for current asse ts and current liabiliti es to reach respectively € 60B and € 55B in 2025 and there fore a NWC o f € 5 B. 0.00 1.00 2.00 3.00 4.00 5.00 6.00 2 015 2 016 2 017 2 018 2 019 2 020 2 021 2 022 2 023 2 024 2 025 Asset Turnover Forecasted ATO 0.00 0.20 0.40 0.60 0.80 1.00 1.20 1.40 1.60 1.80 2 011 2 012 2 013 2 014 2 015 2 016 2 017 2 018 2 019 2 020 2 021 2 022 2 023 2 024 2 025 Dividend per share Forecasted DPS 0 10 000 20 000 30 000 40 000 50 000 60 000 70 000 80 000 2 011 2 012 2 013 2 014 2 015 2 016 2 017 2 018 2 019 2 020 2 021 2 022 2 023 2 024 2 025 Sales Forecasted Sales 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% 2 011 2 012 2 013 2 014 2 015 2 016 2 017 2 018 2 019 2 020 2 021 2 022 2 023 2 024 2 025 Growth margin Forecasted Growth margin 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 2 011 2 012 2 013 2 014 2 015 2 016 2 017 2 018 2 019 2 020 2 021 2 022 2 023 2 024 2 025 Expense ratio Forecasted Expense ratio 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 0 500 1 000 1 500 2 000 2 500 3 000 3 500 4 000 2 012 2 013 2 014 2 015 2 016 2 017 2 018 2 019 2 020 2 021 2 022 2 023 2 024 2 025 CAPEX Forecasted CAPEX CAPEX/ Sales Forecasted CAPEX/ Sales 0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0% 70.0% 80.0% 90.0% 100.0% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 2 011 2 012 2 013 2 014 2 015 2 016 2 017 2 018 2 019 2 020 2 021 2 022 2 023 2 024 2 025 D&A/ NCA Forecasted D&A/ NCA D&A/ Sales Forecasted D&A/ Sales 0 10 000 20 000 30 000 40 000 50 000 60 000 70 000 2 011 2 012 2 013 2 014 2 015 2 016 2 017 2 018 2 019 2 020 2 021 2 022 2 023 2 024 2 025 Current assets Forecasted CA Current liabilities Forecasted CL Arnaud SEITE arnaud. seite@ ya hoo.fr 6 Blue - Sky Discounted Cash Flow Valuation ( NOPAT - ∆NOA) in millions, except present and target values 2020 2021 2022 2023 2024 2025 Free Cash Flow - 7 589.0 4 942.0 1 708.0 1 714.3 1 883.6 2 090.3 Discount rate 5.34% Perpetual growth rate 3.00% Discount period 1 2 3 4 5 Present Value of FCF 4 691.4 1 539.2 1 466.6 1 529.7 1 611.6 Continuing Value 94 111.9 Present Value of Continuing Value 72 557.7 Tot al Entreprise value 75 807.3 Net debt 2 656.0 # of shares outstanding (12 - 2020) 784.0 Share Value (12 - 2020) 93.31 Target Price (12 - 2021) 98.29 Grey - Sky Discounted Cash Flow Valuation ( NOPAT - ∆NOA) in millions, except present and target values 2020 2021 2022 2023 2024 2025 Free Cash Flow - 7 589.0 1 042.9 805.5 1 089.8 1 359.1 1 276.1 Discount rate 5.34% Perpetual growth rate 2.00% Discount period 1 2 3 4 5 Present Value of FCF 990.0 725.9 932.3 1 103.8 983.9 Continuing Value 40 250.8 Present Value of Continuing Value 31 032.3 Total Entreprise value 28 179.2 Net debt 2 656.0 # of shares outstanding (12 - 2020) 784.0 Share Value (12 - 2020) 32.56 Target Price (12 - 2021) 34.29 Blue - Sky Discounted Unlevered Cash Flow Valuation in millions, except present and target values 2020 2021 2022 2023 2024 2025 Unlevered FCF - 12 996.0 2 232.7 2 426.1 2 507.1 3 155.1 3 566.5 Discount rate 5.34% Perpetual growth rate 3.00% Discount period 1 2 3 4 5 Present Value of FCF 2 119.6 2 186.3 2 144.9 2 562.3 2 749.7 Continuing Value 160 571.3 Present Value of Continuing Value 123 796.1 Total Entreprise value 122 562. 9 Net debt 2 656.0 # of shares outstanding (12 - 2020) 784.0 Share Value (12 - 2020) 152.94 Target Price (12 - 2021) 171.19 Grey - Sky Discounted Unlevered Cash Flow Valuation in millions, except present and target values 202 0 2021 2022 2023 2024 2025 Unlevered FCF - 12 996.0 1 526.7 1 432.0 1 301.7 1 646.2 2 006.5 Discount rate 5.34% Perpetual growth rate 2.00% Discount period 1 2 3 4 5 Present Value of FCF 1 449.3 1 290.5 1 113.6 1 336.9 1 546.9 Continuing Value 63 286.4 Present Value of Continuing Value Total Entreprise value 57 027.6 Net debt 2 656.0 # of shares outstanding (12 - 2020) 784.0 Share Value (12 - 2020) 69.35 Target Price (12 - 2021) 77.63 Arnaud SEITE arnaud. seite@ ya hoo.fr 7 WACC Computat ion Average 1y equity 57 975 Average 1y debt 13 622 Equity financing 81.0% Cost of Equity 6.05% Debt financing 19.0% Cost of Debt 3.02% Tax rate 22.61% WACC 5.34% According to the assumptions made on page 5 (more to see on the Appendix for the G rey sky scenario) I took the decision to compute and average two different discounted cash flow methods : one using free cash flows computed as NOPAT – ∆NOA and one using unlevered free cas h flow computed as NOPAT + D &A – cash taxes – CAPEX – ∆NWC. The mai n difference between those two methods is the use of ∆NOA for the first one and ∆NWC for the second one NOA uses operating assets and liabilities while N WC uses current assets and liabilities. However, for Airbus Group, operating assets and liabilities which are no n - curr ent strongly counterbalanced operating current growth. Therefore, non - current contract liabilit ies increase of € 2,232M, PP&E decrease o f € 620M and so on offset by more than € 4.0B the growth in NOA. On the other hand, non - operating current assets and liabilities did not off set the sharp rise in NWC . It has mainly been driven by cash increase and trade liabilities, current other liabiliti es and current contract liabilities decrease. Perpetual g rowth rate has arbitrarily been chosen to be 3% for the blue - sky scenario, which is quite conservative, and 2% for the grey - sky scenario, at the theor etical inflation growth rate. Companies used as competitors are: Boeing , Lock heed Martin, Bombardier, General Dynamics, Textron and Dassa ul t Aviation. P/S being the only comparable method giving the same stock price range as DCF ’ s, I chose not to take into account comparable ratios in my final Target price recommendation Indeed, Airbus Group P/B ratio lays around 1 1. 5 while its competitors ’ median is 1.9 which would suppose that Airbus is way overvalued and considered as a high po tential growth firm, which certainly isn ’ t. According to competitors, Airbus ’ s P/EBITD A is overvalued too. However, its 6 - years average is 16.1 and as forecasted, the Company ’ s EBITDA is trending to continuously increase over the years. Hence, and because Aer ospace industry is unique, I think that ratios given out of general competitors are not re vealing anything and m ust be taken with a grain of salt. Airbus Group ’s 20 20 WACC has been computed as follows: equity is Airbus ’s average daily stock price over one - year times the average number of shares outstanding over 2020. Debt is the Company ’s averag e short - term and long - term debt ’s pri ncipal amount outstanding over 2020 Cost of equity is computed using the Company ’s CAPM with a market rate of 3.92% (yearly CAC 40 growth rate over the ten last years) , risk free rate of - 0.37% according to the French 10 years government bon ds coupon in 2021 and a Beta of 1. 495 using log - normal daily stock returns over the last five years . Cost of debt is 2020 interest expenses divided by averaged 2020 short - term and long - term financing liabilities $82.62 $52.72 $13.65 $15.62 $34.29 $77.63 $87.75 $65.98 $35.53 $20.73 $98.29 $171.19 0 20 40 60 80 100 120 140 160 180 P/S P/EBITDA P/EBIT P/B DCF – EBIT - ∆NOA DCF – UFCF Valuation summary - Equity Value per Share (USD) Target Price Arnaud SEITE arnaud. seite@ ya hoo.fr 8 Appendix 1: Op timistic and pessimistic pro - forma Airbus Group ’ s forecasted FCF Optimistic Pro - forma Airbus Group's f orecasted FCF in millions 2018 2019 2020 2021 2022 2023 20 24 2025 Sales growth rate 10.6% - 29.2% 6.0% 8.0% 6.0% 4.0% 3.0% Sales 63 707 70 478 49 912 52 907 57 139 60 568 62 990 64 880 Cost of sales 54 920 59 973 44 250 46 558 49 997 52 694 54 487 55 991 Gross Margin rate 13.8% 14.9% 11.3% 12.0% 12.5% 13.0% 1 3.5% 13.7% Gross Margin 8 787 10 505 5 662 6 349 7 142 7 874 8 504 8 889 Expense ratio 8.4% 13.0% 9.9% 9.0% 9.0% 9.2% 9.2% 9.4% Expenses 5 322 9 184 4 959 4 762 5 143 5 572 5 795 6 099 Core EBIT 3 465 1 321 703 1 587 2 000 2 302 2 709 2 790 Number of shares outstanding 776 782 784 784 784 784 784 784 Core EPS 4.47 1.69 0.90 2.02 2.55 2.94 3.45 3.56 Dividends paid 1 161 1 280 0 627 784 941 1 098 1 254 Core DPS 1.50 1.64 0.00 0.80 1.00 1.20 1.40 1.60 ATO 4.11 5.72 2.53 3.30 3.60 3.80 3.90 4.00 NOA 1 5 485 12 311 19 746 16 032 15 872 15 939 16 151 16 220 Free Cash Flow 1 076 - 7 589 5 301 2 160 2 235 2 496 2 721 Cash taxes 2 389 39 359 452 520 612 631 NOPAT - 1 068 664 1 228 1 548 1 781 2 096 2 159 D&A 2 927 2 831 1 905 2 171 2 423 2 520 2 570 EBITDA 4 248 3 534 3 492 4 171 4 724 5 228 5 360 CAPEX 3 448 2 211 1 587 2 000 2 423 2 205 1 928 Changes in NWC - 3 597 14 280 - 687 - 707 - 726 - 744 - 765 Unlevered FCF 2 008 - 12 996 2 233 2 426 2 507 3 155 3 566 Pessimistic Pro - forma Airbus Group's forecasted FCF in thousands of HKD 2018 2019 2020 2021 2022 2023 2024 2025 Sales growth rate 10.6% - 29.2% 4.0% 6.0% 4.0% 2.0% 2.0% Sales 63 707 70 478 49 912 51 908 55 023 57 224 58 368 59 536 Cost of sales 54 920 59 973 44 250 45 939 48 585 5 0 414 51 306 52 213 Gross Margin rate 13.8% 14.9% 11.3% 11.5% 11.7% 11.9% 12.1% 12.3% Gross Margin 8 787 10 505 5 662 5 969 6 438 6 810 7 063 7 323 Expense ratio 8.4% 13.0% 9.9% 10.2% 10.4% 10.6% 10.8% 11.0% Expenses 5 322 9 184 4 959 5 295 5 722 6 066 6 304 6 549 Core EBIT 3 465 1 321 703 675 715 744 759 774 Number of shares outstanding 776 782 784 784 784 784 784 784 Core EPS 4.47 1.69 0.90 0.86 0.91 0.95 0.97 0.99 Dividends paid 1 161 1 280 0 470 627 784 941 941 Core DPS 1.50 1.64 0.00 0.60 0.80 1.00 1.20 1.20 ATO 4.11 5.72 2.53 2.70 2.90 3.10 3.30 3.50 NOA 15 485 12 311 19 746 19 225 18 973 18 459 17 687 17 010 Free Cash Flow 1 076 - 7 589 1 195 967 1 258 1 531 1 451 Cash taxes 2 389 39 153 162 168 172 175 NOPAT - 1 068 664 522 554 576 58 7 599 D&A 2 927 2 831 1 905 2 171 2 423 2 520 2 570 EBITDA 4 248 3 534 2 579 2 887 3 167 3 278 3 344 CAPEX 3 448 2 211 1 587 2 000 2 423 2 205 1 928 Changes in NWC - 3 597 14 280 - 687 - 707 - 726 - 744 - 765 Unlevered FCF 2 008 - 12 996 1 527 1 432 1 3 02 1 646 2 006 Arnaud SEITE arnaud. seite@ ya hoo.fr 9 Appendix 2: Comparable valuation with Boeing, Lockheed Martin, Bombardier, General Dynamics , Textron and Dassault Aviation