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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
28 May 2015
Europe
Equity Research
Aerospace & Defense
Dassault Aviation (AVMD.PA) INITIATION FOCUS LIST STOCK
No longer just for the happy few
■ We initiate coverage of Dassault Aviation with an Outperform rating
and EUR1,470 target price (22% potential upside), and add it to the
Credit Suisse Europe and Global Focus Lists. The free float of this
undercovered EUR11bn market cap A&D stock is rising from just 3% a year
ago to an investible 40%.
■ A unique investment vehicle: Dassault Aviation produces high-end Falcon
business jets (73% of 2014 sales) and the Rafale combat aircraft (27%). It
owns 25% of Thales (worth EUR2.9bn) and has net cash of EUR2.4bn.
■ Business jets rebound: Q1 saw a softer high-end business jet market and
our analysis shows market share losses for Dassault and an ageing fleet.
Deliveries and mix are due to improve in 2017 thanks to the on-going
rejuvenation of its Falcon range, despite the recent market slowdown.
■ Year of the Rafale: We see defence revenues tripling by 2018 as Dassault
has sold 84 Rafales to export customers so far in 2015. We believe that it
may be well placed in several other international tenders (UAE, Malaysia).
■ Multiple boosts to 2017-18 earnings: We see profits rising from 2017,
thanks to revenue increase, a weaker euro, a decrease in R&D (despite our
view of a new business jet launch) and better earnings at Thales.
■ Investible, at last: Interest in, and coverage of, the 6th largest A&D stock in
Europe should expand with its free float. Airbus plans to place its remaining
23% stake by late 2016. As a result, the stock liquidity may at least double.
A blend of a DCF and a 2018 SOTP yields a TP of EUR1,470, consistent
with a Credit Suisse HOLT® warranted price of EUR1,499 per share.
■ Catalysts: Paris airshow (15-19 June); H1 results (24 July); finalisation of
the Rafale contract with India; Airbus placement after 22 September lock-up.
Share price performance
804
1004
1204
May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15
Price Price relative
The price relative chart measures performance against the
CAC 40 INDEX which closed at 5098.54 on 26/05/15
On 26/05/15 the spot exchange rate was €1./Eu 1. -
Eu .92/US$1
Performance Over 1M 3M 12M Absolute (%) 3.6 -5.3 19.1 Relative (%) 5.9 -9.4 6.8
Financial and valuation metrics
Year 12/14A 12/15E 12/16E 12/17E Revenue (Eu m) 3,680.4 4,078.6 4,337.1 5,003.7 EBITDA (Eu m) 423.95 450.83 517.85 674.44 Adjusted Net Income (Eu m) 397.71 442.80 508.16 623.93 CS adj. EPS (Eu) 39.75 50.82 58.33 71.61 ROIC (%) 16.21 79.01 27.34 27.97 P/E (adj., x) 30.42 23.79 20.73 16.88 P/E rel. (%) 183.6 148.1 146.5 132.9 EV/EBITDA 14.0 9.9 9.6 7.3
Dividend (12/15E, Eu) 12.70 IC (12/15E, Eu m) 362.34 Dividend yield (%) 1.1 EV/IC 12.3 Net debt (12/15E, Eu m) -3,519.7 Current WACC 8.00 Net debt/equity (12/15E, %) -90.7 Free float (%) 15.65 BV/share (12/15E, Eu) 450.1 Number of shares (m) 9.21
Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates.
Rating OUTPERFORM* Price (26 May 15, Eu) 1,208.90 Target price (Eu) 1,470.00¹ Market cap. (Eu m) 11,138.51 Enterprise value (Eu m) 4,455.5
*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
¹Target price is for 12 months.
Research Analysts
Olivier Brochet
44 20 7888 8508
Ashlee Ramanathan
44 20 7883 9934
Specialist Sales: Andrew Bell
44 20 7888 0479
HOLT Specialist Contact®: Kevin Paul, CFA
44 20 7888 9686
Credit Suisse has decided not to enter into business relationships with
companies that Credit Suisse has determined to be involved in the
development, manufacture or acquisition of anti-personnel mines
and cluster munitions. For Credit Suisse's position on the issue, please
see https://www.credit-suisse.com/media/cc/docs/responsibili
ty/policy-summaries-en.pdf
28 May 2015
Dassault Aviation (AVMD.PA) 2
Dassault Aviation AVMD.PA Price (26 May 15): Eu1,208.90, Rating: OUTPERFORM, Target Price: Eu1,470.00
Income statement (Eu m) 12/14A 12/15E 12/16E 12/17E
Revenue (Eu m) 3,680 4,079 4,337 5,004 EBITDA 424 451 518 674 Depr. & amort. (71) (81) (75) (81) EBIT (Eu) 353 370 442 594 Net interest exp. (0) (13) (8) (10) Associates 132 148 173 191 Other adj, (122) (89) 16 16 PBT (Eu) 362 416 623 791 Income taxes (79) (94) (158) (210) Profit after tax 283 322 465 581 Minorities — — — — Preferred dividends — — — — Associates & other 115 121 43 43 Net profit 398 443 508 624 Other NPAT adjustments (115) (121) (43) (43) Reported net income 283 322 465 581
Cash flow (Eu) 12/14A 12/15E 12/16E 12/17E
EBIT 353 370 442 594 Net interest (0) (13) (8) (10) Cash taxes paid (103) (103) (173) (231) Change in working capital (608) 1,522 (616) (165) Other cash & non-cash items 82 (39) 83 76 Cash flow from operations (277) 1,736 (272) 264 CAPEX (91) (112) (142) (156) Free cashflow adj. 27 10 10 50 Free cash flow to the firm (342) 1,635 (404) 158 Acquisitions — — — — Divestments 27 10 10 50 Other investment/(outflows) (0.49) — — — Cash flow from investments (65) (102) (132) (106) Net share issue/(repurchase) (934) (451) — — Dividends paid (90) (87) (111) (137) Issuance (retirement) of debt 668 — — (50) Other (689) 27 22 123 Cash flow from financing activities
(1,044) (512) (88) (64) Effect of exchange rates 75 — — — Changes in Net Cash/Debt (1,311) 1,123 (492) 93 . Net debt at start (3,708) (2,397) (3,520) (3,028) Change in net debt 1,311 (1,123) 492 (93) Net debt at end (2,397) (3,520) (3,028) (3,121)
Balance sheet (Eu m) 12/14A 12/15E 12/16E 12/17E
Assets Cash and cash equivalents 708 2,256 1,742 1,762 Accounts receivable 723 559 654 823 Inventory 3,092 3,576 4,183 4,565 Other current assets 216 291 302 329 Total current assets 4,739 6,682 6,880 7,479 Total fixed assets 417 454 518 581 Intangible assets and goodwill 37 28 26 24 Investment securities 2,797 2,372 2,394 2,417 Other assets 1,940 2,046 2,197 2,310 Total assets 9,929 11,581 12,015 12,811 Liabilities Accounts payable 835 860 915 1,056 Short-term debt 92 92 92 92 Other short term liabilities 4,014 5,853 5,878 6,140 Total current liabilities 4,941 6,806 6,885 7,288 Long-term debt 893 893 893 843 Other liabilities — — — — Total liabilities 5,833 7,699 7,778 8,131 Shareholders' equity 4,096 3,882 4,236 4,680 Minority interest 0.37 0.40 0.40 0.40 Total equity & liabilities 9,929 11,581 12,015 12,811 Net debt (Eu m) (2,397) (3,520) (3,028) (3,121)
Per share data 12/14A 12/15E 12/16E 12/17E
No. of shares (wtd avg) 10 9 9 9 CS adj. EPS (Eu) 39.75 50.82 58.33 71.61 Prev. EPS (Eu) — — — — Dividend (Eu) 10.00 12.70 15.75 20.77 Div yield 0.83 1.05 1.30 1.72 Dividend payout ratio 25.16 25.00 27.00 29.00 Free cash flow per share (Eu)
(34.14) 187.62 (46.33) 18.12
Key ratios and valuation
12/14A 12/15E 12/16E 12/17E
Growth (%) Sales (19.9) 10.8 6.3 15.4 EBIT (29.2) 4.8 19.6 34.2 Net profit (18.4) 11.3 14.8 22.8 EPS (17.4) 27.9 14.8 22.8 Margins (%) EBITDA margin 11.5 11.1 11.9 13.5 EBIT margin 9.6 9.1 10.2 11.9 Pretax margin 9.8 10.2 14.4 15.8 Net margin 10.8 10.9 11.7 12.5 Valuation metrics (x) EV/sales 1.6 1.1 1.1 1.0 EV/EBITDA 14.0 9.7 9.5 7.2 EV/EBIT 16.8 11.9 11.1 8.2 P/E 30.4 23.8 20.7 16.9 P/B 2.7 2.7 2.5 2.2 Asset turnover 0.37 0.35 0.36 0.39 ROE analysis (%) ROE stated-return on equity
6.0 8.0 11.4 12.9 ROIC 16.2 79.0 27.3 28.0 Interest burden 1.0 1.1 1.4 1.3 Tax rate 21.9 22.6 25.3 26.5 Financial leverage 0.24 0.25 0.23 0.20 Credit ratios (%) Net debt/equity (58.5) (90.7) (71.5) (66.7) Net debt/EBITDA (5.7) (7.8) (5.8) (4.6) Interest coverage ratio 835.9 29.5 53.1 61.1
Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities
(EUROPE) LTD. Estimates.
804
1004
1204
May-13 Sep-13 Jan-14 May-14 Sep-14 Jan-15
Price Price relative
The price relative chart measures performance against the CAC 40 INDEX which
closed at 5098.54 on 26/05/15
On 26/05/15 the spot exchange rate was €1./Eu 1. - Eu .92/US$1
28 May 2015
Dassault Aviation (AVMD.PA) 3
Table of contents Dassault Aviation AVMD.PA 2 Key charts 4 Investment summary 5
We initiate on Dassault Aviation with an Outperform rating and target price of
EUR1,470 per share; we add it to the Global Focus List 5 Dassault Aviation in brief 5 Key drivers for the stock 6 Valuation 7 Potential risks 7
Valuation 8 Target price EUR1,470 8 Comparison with peers 8 Sum-of-the-parts 9 DCF 10 Not the best yield story 11 25-35% of Dassault's value for the stake in Thales 12
Stock liquidity rising 13 Free float to increase to 40% 13 Liquidity could double or triple again 13 Financial communication to expand 15 Family control reinforced 15
Hat-trick for the Rafale in 2015 17 Three months, three orders, 84 aircraft 17 Rafale production to increase in 2018 19 Further export potential for the Rafale 21
Falcon revenues to grow again from 2017 26 Softening of growth in the business jet market 26 Q1 2015 looks soft across the business jet sector 30 Dassault to rebound thanks to its rejuvenated product range 31 Falcon deliveries to grow after 2017 35
Moderate expansion of services 37 Moderate growth in Falcon support revenues, increase in trade-ins 37 Non-OE defence activities likely to remain solid 43
Earnings drivers: volumes, mix, FX, R&D, Thales 46 Group revenues to jump by about 80% by the end of the decade 46 Falcon revenues to nearly double by 2020 47 Export strength should offset French weakness in defence 50 FX: EUR8m sensitivity/1 cent and rising 52 R&D tailwind, even if a new programme is launched 55 A rising contribution from the 25% stake in Thales 58 Earnings to increase sharply on volumes and margin expansion 60 A large net cash position 65
Dassault products and competitors 68 Business jets 68 Military platforms 69
Credit Suisse HOLT® perspective 72
PEERS 74 Divisional and financial data 75
28 May 2015
Dassault Aviation (AVMD.PA) 4
Key charts Figure 1: Free float to reach 40% in EURm
Figure 2: Plenty of room for liquidity to improve in EURm, % of free float traded daily – rhs – 2014-2015
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
31 December2013
31 March 2015 End 2016E @EUR1,200
End 2016E @ TP
Free float Dassault family (GIMD)
Airbus Group Treasury shares
Free float as % of shares - rhs
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Airb
us
Rol
ls-R
oyce
Saf
ran
BA
E S
yste
ms
Fin
mec
cani
ca
Zod
iac
Aer
ospa
ce
Meg
gitt
Tha
les
Cob
ham
Das
saul
t Avi
atio
n
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse research
Figure 3: Rafale deliveries in number or aircraft
Figure 4: Deliveries and ASPs - Falcon ASP in USDm, deliveries in number of Falcons
0
5
10
15
20
25
30
35
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
France Egypt
Qatar India
LPM 2014-2019 Minimum production rate
Installed capacity
0
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20
30
40
50
60
70
80
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100
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Deliveries Average selling price in USDm - rhs
Source: Company data, Credit Suisse estimates Source: GAMA data, Credit Suisse estimates
Figure 5: Defence boom and Falcon expansion in EURm
Figure 6: A structural net cash position in EURm
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Falcon Defence France
Defence export Operating margin in % - rhs
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1996 1999 2002 2005 2008 2011 2014 2017E 2020E
Thales acquisition / buyback
Net cash
Customer advances net of work-in-progress
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
28 May 2015
Dassault Aviation (AVMD.PA) 5
Investment summary We initiate on Dassault Aviation with an Outperform
rating and target price of EUR1,470 per share; we
add it to the Global Focus List
We believe that Dassault Aviation should attract an increased degree of interest amongst
investors and a wider broker coverage, a potential positive for the value of the stock.
At current price levels, it is the 6th largest Aerospace & Defence stock in Europe. However,
as a consequence of its limited free float (16%), the stock is undercovered by brokers. As
at mid-May 2015, only 9 brokers covered it (vs 34 for Airbus, 22 for Meggitt and 13 for
Senior, for instance). Moreover, most brokers covering the name (5 out 9) have a Neutral
rating.
Figure 7: Dassault Aviation is the 6th
largest European
A&D stock by market cap in EURbn - * covered by Jonathan Hurn, Cap Goods team
Figure 8: Only 9 brokers cover the stock and the majority
have a Neutral rating Number of brokers - * covered by Jonathan Hurn, Cap Goods team – for full list of Credit Suisse ratings, please see disclosures.
-
10,000
20,000
30,000
40,000
50,000
Airb
us G
roup
Saf
ran
Rol
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oyce
BA
E S
yste
ms
Tha
les
Das
saul
t Avi
atio
n
Zod
iac
Aer
ospa
ce
GK
N *
Fin
mec
cani
ca
Meg
gitt
Cob
ham
MT
U
Saa
b
Sen
ior
*
Ultr
a E
lect
roni
c
Qin
etiQ
Che
mrin
g
0
5
10
15
20
25
30
35
Airb
us
Rol
ls-R
oyce
BA
E S
yste
ms
Saf
ran
Meg
gitt
GK
N *
Tha
les
Sen
ior
*
Das
saul
t Avi
atio
n
Sell Neutral Buy
Source: Thomson Reuters, Credit Suisse research Source: Thomson Reuters, Credit Suisse research
With Airbus selling its remaining 23% stake (the next placement appears possible after the
current lock-up expires on 22 September), we estimate Dassault Aviation's free float will
rise from 3% in 2013 to 40% by late 2016E. Its liquidity is likely to double or triple again,
after having already moved from EUR200k before Airbus' first disposal in November 2014
to nearly EUR5m today.
Dassault Aviation in brief
Dassault Aviation is a French aircraft manufacturer with revenues of EUR3,680m in 2014,
centred on high-end Falcon business jets (73% of 2014 revenues, active fleet of 2,050
aircraft) and fighter aircraft including the Rafale (21% for France, 6% from exports, active
fleet of 1,000 planes).
Its operating margin was 9.6% of sales in 2014 (EUR353m), despite fully expensing 13.3%
of revenues in R&D costs (EUR488m). This is a testimony of its high underlying
profitability. Its operating profit does not include the income from the 25% stake it owns in
Thales (valued at EUR139m in December 2014).
Its net cash position was EUR2.4bn at the end of 2014 and has not fallen below EUR1bn
in the last 20 years.
28 May 2015
Dassault Aviation (AVMD.PA) 6
Key drivers for the stock
In our view, the key drivers for share price appreciation will be the potential for a near
doubling of revenues between 2014 and 2018E, supported by strong earnings growth:
■ A jump in defence revenues from EUR1bn in 2014 to an average of EUR2.5bn over
2018E-20E, after the recent export wins for the Rafale (84 aircraft sold to Egypt, Qatar
and India – the latter being finalised) and possible new orders (in the UAE or
Malaysia);
■ A rebound in Falcon deliveries and mix starting in 2017-18 driven by the EIS of new
aircraft, after a period of flat sales on low levels and market share loss. The growth in
the US, which still accounts for two-thirds of the market, should mitigate the current
softness in China, Russia and Brazil. We see business jet revenues rising by 50%
between 2014 and 2018E.
This volume boom should drive a margin expansion from 9.6% in 2014 (its lowest of the
last 15 years) to 12-13% in 2019E-20E, thanks to a very cost-efficient structure. The group
provides no breakdown of its profitability by activity and most of its plants are specialised
by industrial process, not by product.
Earnings growth will also be driven by:
■ FX, with an estimated EBIT sensitivity of EUR8m today for each 1 cent move in FX
(EUR15m in 2020E); our model is built on a EURUSD spot rate of 1.15. Its gross
exposure (most Falcon are sold in USD) is offset by costs in US dollar (purchase of
Falcon engines or avionics, as well as their final completion in its Arkansas-based
plant).
■ A decrease in R&D as a % of revenues from 13.3% in 2014 (none of which is
capitalised), after the EIS of the new products under development. Our numbers
assume new aircraft development after 2017E.
■ Continued earnings improvement at Thales, in which Dassault Aviation owns a 25%
stake. The share of Thales net income is not included in Dassault Aviation's EBIT,
contrary to how this is accounted for at its peers.
Figure 9: Revenues and operating margin to rebound in EURm, % of revenues
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Falcon Defence France Defence export Operating margin in % - rhs
Source: Company data, Credit Suisse estimates
28 May 2015
Dassault Aviation (AVMD.PA) 7
Valuation Our target price of EUR1,470 is derived from an average of our DCF (EUR1,550) and
2018E SOTP (EUR1,368), to which we add EUR13 to account for the difference between
Thales' last share price (EUR57) and our TP for this stock (EUR59). Credit Suisse HOLT®
warranted price of EUR1,499 per share is consistent with our target price.
Our DCF model captures the long-term prospects, after the company has executed the
current export Rafale orders. It assumes the EURUSD spot stays at c.1.15 to perpetuity.
Our 2018E SOTP reflects the expected expansion of earnings driven by a rise in business
jets (renewed range) and combat aircraft, as well as the improvement of USD hedge rates
(1.25 in 2014, mostly through accumulators).
Potential risks To the downside
■ Any slowdown of the US business jet market (two-thirds of the group's fleet) would
impact Dassault Aviation; for instance, in the event of the accelerated depreciation
rules for business jets not being renewed (a key support to the US market strength).
■ A weakening of the US dollar would penalise the sales and earnings of the group,
with a transaction sensitivity of EUR8m for each 1 cent of the EURUSD rate,
increasing to EUR15m by the end of the decade. Moving our model to 1.20 instead of
1.15 would reduce our valuation by EUR60 per share (-4 %).
■ Delay to the signing of a contract with India for 36 Rafale would reduce our
numbers, as we have considered this contract very likely and included the first
deliveries in our 2018 forecasts. This would reduce our 2018-20 EPS forecasts by
EUR7 per share (-7%).
■ Programme issues with the new models, Falcon 8X and Falcon 5X, would hurt
deliveries and generate additional costs. The engine of the Falcon 5X is one key area
to watch, given it is Safran's first endeavour in this domain. We note Safran has just
announced a six-month delay for the Silvercrest engine certification (on 19 May).
Dassault has not changed the date of the first flight of the aircraft.
■ A persistent slowdown in the Chinese economy would reverberate on other
markets and probably reduce the number of business jets needed. It would also push
used aircraft inventories higher, putting pressure on prices and new orders.
■ Difficulties at Thales would reduce its contribution to the net income of the group.
Investors are keenly aware of issues at DCNS and in Transport that impacted 2014
numbers.
■ If Airbus does not sell down its remaining 23% stake, the stock's liquidity will
remain subpar.
To the upside
■ A new Rafale order in the export market (beyond Egypt, Qatar and India, which
are included in our numbers) would boost the group's medium-term earnings and cash
prospects.
■ Weakness of the euro against the US dollar would boost Dassault Aviation's future
earnings past its current hedging horizon. Moving our model to 1.10 instead of 1.15
would increase our valuation by EUR60 per share (+4%).
■ Actions to boost business jet appeal in the Chinese market would be very
favourable to Dassault Aviation's rejuvenated product line.
■ A change in cash distribution policy towards increased cash distribution would
attract income funds which may be deterred by the current 23% pay-out level.
28 May 2015
Dassault Aviation (AVMD.PA) 8
Valuation The stock has been listed since 1971. However, until 2014, its valuation has reflected the
very low liquidity (with just a few shares traded every day). The resulting discount should
disappear, now that the free float is moving from 3% of the shares in early 2014 to 40% by
the end of 2016E.
Target price EUR1,470
Our target price of EUR1,470 per share is derived from the average of our DCF
(EUR1,550) and 2018E SOTP (EUR1,368) to which we add the difference between
Thales' last price (used for our valuations) and our TP for Thales (to reflect the potential
upside). Our DCF captures the long-term value of the business and takes into account the
peak of activity on the Rafale in 2018-2020 and the reduction of defence revenues that will
follow. It also assumes a long-term view on FX (EURUSD spot at 1.15). Our SOTP gives a
reference vs peers and offers a more short-term view. The HOLT warranted price of
EUR1,499 per share is broadly consistent with our valuation.
Figure 10: Target price for Dassault Aviation in EUR per share
EUR per share Implied P/E - 2016E Implied P/E - 2018E
2018E SOTP 1,366 23.4x 15.8x
DCF 1,550 26.6x 17.9x
Average 1,458 25.0x 16.8x
Thales' upside to CS TP vs current price 13
Dassault Aviation TP 1,471 25.2x 17.0x
Source: Company data, Credit Suisse estimates.
Moving our EURUSD assumption from 1.15 to 1.10 would add EUR60 per share to our
valuation (+4%). Conversely, moving to 1.20 would remove EUR60 (-4%).
Comparison with peers
We have compared the stock to a peer group which includes the following companies:
Lockheed Martin, Boeing, General Dynamics, Textron, Embraer, Bombardier and BAE
Systems. They are all involved in business jets or combat aircraft, but are also much more
diversified than Dassault, with some in defence electronics (Lockheed Martin, GD) or in
commercial aviation (Boeing, Embraer, Bombardier).
The stock has historically looked expensive in P/E terms. We believe this is a
consequence of its recurring high cash pile (has not fallen below EUR1bn in the last 20
years) despite having bought back its shares from Airbus and having bought 25% of
Thales. For the same reason, its EV has historically been compressed until Airbus
announced, in 2014, its plan to dispose of its stake.
28 May 2015
Dassault Aviation (AVMD.PA) 9
Figure 11: Dassault Aviation - EV/EBIT (x) reported excluding Thales contribution in EBIT
Figure 12: Dassault Aviation – P/E (x)
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
18.0x
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
EV/EBIT 2002-2014 average Peers
0.0x
5.0x
10.0x
15.0x
20.0x
25.0x
30.0x
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
P/E 2001-2014 average Peers
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 13: Dassault Aviation – EV/Sales (x) Figure 14: Dassault Aviation – EV/EBITDA (x)
0.00x
0.20x
0.40x
0.60x
0.80x
1.00x
1.20x
1.40x
1.60x
1.80x
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
EV/sales 2002-2014 average Peers
-2.0x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
EV/EBITDA 2002-2014 average Peers
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Sum-of-the-parts
A 2018E SOTP yields a valuation of EUR1,368.
Given that no divisional profitability is available, we have used mid-cycle EV/sales
multiples. The implicit assumption is that the profitability weighting between the two
activities (Falcon and Defence) is similar to that of sales. We base our calculation on
2018E, at which point the initial impact of the improved FX rates should be felt. At this
level, Dassault would trade on an EV/EBIT multiple of 9.2x, vs 9.1x for the peer group.
For the Falcon business, we have added a 30% premium to our peer group's multiple to
reflect; (1) the quality of the business, (2) improved USD rate beyond 2018E, and (3) a still
high level of R&D.
In Defence, we restated 2018 estimates to account for only 20% of the revenue that we
expect on the F3-R standard (a 5-year contract booked as work-in-progress between 2013
28 May 2015
Dassault Aviation (AVMD.PA) 10
and 2017E and fully accounted for in revenues and profits in 2018E). We apply the same
treatment to the Atlantique 2 maritime patrol upgrade (ATL2).
Figure 15: 2018E SOTP in EURm
Sales Operating
income
Margin % EV/Sales
(x)
EV EV/share
(EUR)
as a % of
total value
Comment
Falcon 4,039 1.10x 4,461 512 35% 30% premium to sample
Defence exc. F3-R 2,540 0.95x 2,422 278 19%
F3-R 800 0.19x 153 18 1% on 20% of the F3-R standard
revenues
Total 7,378 769 10.4% 0.95x 7,036 808 55%
Implied EV/EBIT 9.2x
Add: net cash 3,243 372 25%
Less: pensions -463 -53 -4%
Add: Thales stake (25.5%) 3,053 350 24% at market value
Total 12,869 1,477
Discounted value 11,916 1,368 discounting back to 2016
Number of shares (m) 8.713
Source: Credit Suisse estimates
The enterprise value has to be adjusted for the following elements:
■ Net cash;
■ Pensions (net of tax);
■ 25% stake in Thales, taking into account that Dassault's share of Thales net income is
not included in operating profits;
■ The group does not carry any refundable advances that would need to be restated.
We discount the valuation back to 2017E (using 2017E multiples from our sample) at a
rate of 8%.
DCF
Our DCF yields a valuation of EUR1,550 per share.
Our main assumptions are based on our 2015-20 forecasts, a fading of growth to 2024E
(in particular, we have assumed that no new Rafale orders follow the three in 2015 and
that the production would return to 11 per year for France), a terminal valuation based on
a 2.5% growth to perpetuity (blending a rate of growth of business jets similar to global
economic growth and stable revenues in defence). We have kept the operating margin
stable at 13.5% to perpetuity (reflecting the implicit assumption of a EURUSD rate of
1.15). We have assumed that WCR needs would be fully financed by down payments
beyond 2020.
The discount rate that we have used is 8%, reflecting the cost of equity - given Dassault
Aviation's structural net cash position.
We adjust the resulting value for net cash, pensions (net of tax) and the stake in Thales
valued at market price.
28 May 2015
Dassault Aviation (AVMD.PA) 11
Figure 16: Discounted cash flows in EURm
2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E
Falcon 2,685 2,943 3,098 3,419 4,039 4,547 4,762 4,905 5,052 5,204 5,360
Growth in % 10% 5% 10% 18% 13% 5% 3% 3% 3% 3%
Defence France 770 495 720 270 1,200 270 270 274 500 700 700
Growth in % -36% 45% -63% 344% -78% 0% 1.5% 82% 40% 0%
Defence export 225 641 519 1,315 2,140 2,009 1,582 1,107 554 388 271
Growth in % 185% -19% 153% 63% -6% -21% -30% -50% -30% -30%
Revenues - total 3,680 4,079 4,337 5,004 7,378 6,826 6,614 6,287 6,106 6,292 6,331
Growth in % -20% 11% 6% 15% 47% -7% -3% -5% -3% 3% 1%
Change in EURm -913 399 258 667 2,375 -553 -211 -328 -181 185 40
Operating income 353 370 442 594 769 855 892 847 823 848 853
Margin in % 9.6% 9.1% 10.2% 11.9% 10.4% 12.5% 13.5% 13.5% 13.5% 13.5% 13.5%
D&A 8 74 68 46 48 49 89 63 61 63 63
In % of sales 0.2% 1.8% 1.6% 0.9% 0.6% 0.7% 1.3% 1.0% 1.0% 1.0% 1.0%
EBITDA 361 444 511 639 816 905 980 910 884 911 917
Margin in % 9.8% 10.9% 11.8% 12.8% 11.1% 13.3% 14.8% 14.5% 14.5% 14.5% 14.5%
Tax -122 -129 -155 -208 -269 -299 -312 -297 -288 -297 -299
As a % of op. income -35% -35% -35% -35% -35% -35% -35% -35% -35% -35% -35%
Cash-flow from operations 239 314 356 432 547 605 668 614 596 614 618
Capex -65 -102 -132 -107 -37 -32 -87 -63 -61 -63 -63
In % of sales -1.8% -2.5% -3.0% -2.1% -0.5% -0.5% -1.3% -1.0% -1.0% -1.0% -1.0%
WCR change -608 1,522 -616 -165 -278 -7 220 0 0 0 0
In % of sales 67% 382% -238% -25% -12% 1% -104% 0% 0% 0% 0%
Net cash-flow -434 1,735 -391 161 233 566 802 551 535 551 555
NPV 1,606 -335 128 171 385 505 321 289 276 257
2015E-2024E cash flows 3,603
Value to perpetuity 4,788
Net cash 2014 2,397
Pensions 2014 -316
Thales (25.5% stake) 3,035
Total 13,507
Value per share (EUR per share) 1,550
Number of shares (m) 8.713
Source: Company data, Credit Suisse estimates
Figure 17: Sensitivity table in EUR per share
Growth to perpetuity
2.0% 2.5% 3.0%
7% 1,679 1,756 1,852
Discount rate 8% 1,502 1,550 1,608
9% 1,376 1,408 1,445
Source: Credit Suisse estimates
Not the best yield story
The dividend is currently well below peers, with a 23% pay-out on adjusted consolidated
net income in 2014. This is already an improvement on the 18% pay-out in the last two
years. Traditionally, the group paid a third of the parent company's reported net income
(37% in 2014 vs 32% over 2001-2013), see Figure 109. This compares with its European
peer group which pays out 40% or more. The resulting 1% dividend yield is well below that
of its European peers, which is between 2.0% and 4.5%.
28 May 2015
Dassault Aviation (AVMD.PA) 12
A radical change in Dassault Aviation's pay-out policy appears unlikely to us, even if we
see room for some potential upside; however, the group may consider a gradual increase
of the pay-out, with the aim of eventually reaching the level of its peers (40-50%). We
believe that there is a low likelihood of this in our forecast horizon. We have modelled 35%
in 2020, which would take the yield on current price to 3%.
The FCF yield is volatile, as a result of the lumpy nature of the group's FCF. On average
since 2001, the FCF yield is 6%.
Figure 18: A dividend yield significantly below peers in %
Figure 19: FCF is volatile in %
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Dividend yield 2001-2014 average Peers
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
FCF yield 2001-2014 average Peers
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
25-35% of Dassault's value for the stake in Thales
Dassault Aviation owns 25.5% of Thales (which we rate Outperform, with a target price of
EUR59). This stake accounts for 25-35% of the value of Dassault Aviation, as detailed
below.
Our DCF and SOTP are built using Thales' list price (EUR57). In our Dassault target price
calculation, we include the potential upside we see for Thales (using our current EUR59
target price). This represents an increase of EUR13 per share to our Dassault Aviation's
valuation.
Figure 20: The value of Thales' stake for Dassault Aviation in EURm, EUR per share
Last
price
Target
price
Thales' price 45 50 57 59 60 65 70
Thales - implied market cap 9,415 10,461 11,909 12,344 12,554 13,600 14,646
Dassault's share (25.5%) 2,401 2,668 3,037 3,148 3,201 3,468 3,735
Thales value per Dassault Aviation share 276 306 349 361 367 398 429
Potential Upside/downside to Dassault's price -73 -42 0 13 19 49 80
Dassault Aviation share price 1,192 1,192 1,192 1,192 1,192 1,192 1,192
Thales as % of Dassault Aviation's price 23% 26% 29% 30% 31% 33% 36%
Source: Credit Suisse estimates
28 May 2015
Dassault Aviation (AVMD.PA) 13
Stock liquidity rising The sharp increase in free float should heighten awareness of the potential attractiveness
of Dassault Aviation's share for investors. It should help reduce the current liquidity
discount, as traded volumes rise. A financial communication policy will be set up, which we
believe will reinforce this attractiveness. We believe that stock liquidity could potentially
double or triple, from the current c.EUR4.5m per day.
Free float to increase to 40%
Dassault Aviation's free float should rise from the current 16% to c.40% at the end of
2016E.
Airbus is disposing of all its shares
At the start of 2014, Airbus Group held 4.69m Dassault Aviation shares. It sold 810k in
November 2014 and 1.73m more in late March 2015.
It currently holds 2.15m shares, which we expect to be sold by the end of 2016. The 180-
day lock-up after the March 2015 placement runs until 22 September and we think it is
likely that the next placement occurs just after this. It may then allow Airbus to launch the
exceptional share buy-back that it is proposing to shareholders at the 27 May AGM.
Dassault Aviation's free float will rise from 3% in 2013 to 40% by late 2016E
This will take Dassault Aviation's free float from 3% in December 2013 to north of c.40% at
the end of 2016E (16% today).
Figure 21: The free float to move from 3% in 2013 to c.40% at the end of 2016E in EURm
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
31 December 2013 31 March 2015 End 2016E @ EUR1,200 End 2016E @ TP
Free float Dassault family (GIMD) Airbus Group
Treasury shares Free float as % of shares - rhs
Source: Company data, Credit Suisse estimates
It may move a little higher at the end of 2017E (42%), if Dassault Aviation decides to
cancel the treasury shares it owns (limit of 10% of the existing shares every 24 months).
Liquidity could double or triple again
The daily traded volumes of Dassault Aviation shares have changed significantly following
the placement by Airbus on 26 March 2015, moving from less than EUR200k per day to
nearly EUR4.5m.
28 May 2015
Dassault Aviation (AVMD.PA) 14
Figure 22: A jump in number of shares traded in shares x1,000, excluding the 26 March 2015 Airbus share placement
0.0
2.5
5.0
7.5
10.0
12.5
18/07/2014 18/09/2014 18/11/2014 18/01/2015 18/03/2015
Source: Thomson Reuters
Current liquidity remains at the low end of the sector and should improve when more
shares are available, with investors having a better understanding of the company.
The stock currently ranks 10th in terms of free float and liquidity in the sector in Europe.
Looking at relative free float sizes in the sector, we think Dassault Aviation's traded
volumes should double or triple from the current levels, to be similar to Thales or Zodiac
Aerospace.
Figure 23: Dassault at the low end of volumes traded in
the sector in EURm, % of free float traded daily – 2014-2015
Figure 24: Free float at the low end of the sector, even
after Airbus' full disposal in EURm
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
Airb
us
Rol
ls-R
oyce
Saf
ran
BA
E S
yste
ms
Fin
mec
cani
ca
Zod
iac
Aer
ospa
ce
Meg
gitt
Tha
les
Cob
ham
Das
saul
t Avi
atio
n
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
Airb
us
Rol
ls-R
oyce
BA
E S
yste
ms
Saf
ran
Zod
iac
Aer
ospa
ce
Meg
gitt
Tha
les
Fin
mec
cani
ca
Cob
ham
Das
saul
t Avi
atio
n
Source: Thomson Reuters Source: Thomson Reuters, Credit Suisse research
28 May 2015
Dassault Aviation (AVMD.PA) 15
Financial communication to expand
Dassault Aviation has a tight communication policy and provides limited guidance on the
next fiscal year; for example, it does not disclose its future hedge rates.
The group has chosen to stop releasing quarterly revenues and orders data, as these are
not very representative of full year performance. It will continue to report H1 and FY results.
Communication is likely to expand, as a financial communication team and policy are set
up in the coming months. However, given that Dassault Aviation will be the only listed
company with direct earnings exposure to business jet activities, we think it is likely that
the level of disclosure will remain broadly unchanged, for competitive reasons.
Until then, it is likely that the market will continue putting a discount on valuation for limited
visibility.
Family control reinforced
We believe that Dassault Aviation is likely to remain controlled by the Dassault family, with
the Groupe Dassault (formerly called GIMD: Groupe Industriel Marcel Dassault) holding
55% of Dassault Aviation. This is set to rise to 59% if Dassault Aviation cancels the
treasury shares it owns (501k), which is technically feasible after late 2016.
Figure 25: Main assets of Groupe Dassault in % of shares
Non-aerospace activities Aerospace & Defence activities
6.1% 41.1% 55.55% 23.36%
25.3%
59.5%26.4%
35.0%
5.9% 5.1% 63.6%
4.9% 5.5% 5.1%53.3% 43.6%
100% 100% 100%
Chateau Dassault
vineyardArtcurial
Immobiliere Dassault
Veolia Environnement Rubis
Gaumont BiomerieuxTransgene
Socpresse (Le Figaro)
Ch. Edelstenne Dassault Systemes Airbus
French State (*)
SABCA Stork (Fokker)
Dassault Aviation
Thales
DCNS
Groupe Dassault
Source: Company data - * The French State owns 1 share in Dassault Aviation and has entered into in a shareholding agreement with Airbus
Dassault Aviation accounts for some 45% of the listed assets owned by the Dassault
family, which is nearly at the same level as the 41% stake in Dassault Systemes.
28 May 2015
Dassault Aviation (AVMD.PA) 16
Figure 26: The value of the listed assets of Groupe Dassault in EURm
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
DassaultSystemes
Dassault Aviation VeoliaEnvironnement
Biomerieux ImmobiliereDassault
Rubis SABCA Transgene Gaumont
Source: Credit Suisse calculation from Thomson Reuters data
Questions from investors are linked to the succession plans of Serge Dassault, CEO of
Dassault Group, and the impact on the long-term strategy for Dassault Aviation. These
plans have been discussed in the French press, but little has been announced by the
family. An advisory committee has been set up for the family, consisting of the following
six individuals, according to Le Figaro: Charles Edelstenne (former CEO of Dassault
Aviation), Bernard Monassier (the family's solicitor), Gérard Limat (a former accountant
from the Dassault Groupe), Henri Proglio (formerly Chairman and CEO of Electricité de
France; he announced on 12 May 2015 that he would not be taking up his role as
Chairman of Thales, see FT, WSJ, 12 May 2015) and Denis Kessler (CEO of SCOR).
28 May 2015
Dassault Aviation (AVMD.PA) 17
Hat-trick for the Rafale in 2015 We expect Dassault Aviation's total defence revenues to triple from the current level of
c.EUR1bn p.a. to c.EUR.3.3bn in 2018E (previous peaks at EUR1.7-1.8bn) thanks to
defence exports (84 Rafale sold to three countries since February 2015). We believe that
there is potential for more exports of the Rafale.
Three months, three orders, 84 aircraft
After 15 years with no orders for new combat aircraft (and the last orders dating from 2000,
with 10 Mirage 2000 for India and 15 for Greece), Dassault Aviation signed agreements for
84 Rafale in less than three months: 24 aircraft for Egypt, 24 aircraft +12 options for Qatar
and a provisional announcement that India would order 36 aircraft.
Figure 27: Export orders for Mirage 2000 and Rafale in number of aircraft
0
10
20
30
40
50
60
70
Egypt India UAE Greece Peru Taiwan Qatar UAE Greece India Egypt Qatar India
1982 1982 1983 1985 1986 1992 1994 1998 2000 2000 2015 2015 2015E
Mirage 2000 Rafale
Source: Company data, Credit Suisse estimates
24 Rafales for Egypt
In February 2015, Egypt signed a firm contract for 24 Rafales, in our view worth
approximately EUR1.7bn+ for Dassault Aviation. The downpayment was paid in March.
Dassault Aviation indicated that the first deliveries will take place in H2 2015 (three
aircraft) and another three will be delivered in early 2016. These aircraft will be diverted
from existing French orders. The delivery schedule for the remaining 18 is unclear and
our assumption is that it will be spread over 2016-18, with more aircraft initially intended
for France being diverted for Egypt. We believe that Egypt will receive F3 standard aircraft,
given the F3-R is still being developed and will only be available from 2018 onwards.
24 Rafales +12 options for Qatar
On 30 April 2015, France announced that Qatar would buy 24 Rafales (+12 options) and
missiles for EUR6.3bn (of which Dassault Aviation has an estimated share of EUR2bn+).
Contracts were signed on 4 May 2015 in Doha and include training for 36 pilots and 100
technicians. Deliveries are to start in mid-2018 for aircraft in the F3-R standard. The
downpayment is yet to be received, probably by the summer in our view.
28 May 2015
Dassault Aviation (AVMD.PA) 18
India: 36 Rafale, to be confirmed and possibly more to come
On 10 April 2015, the Indian Prime Minister announced that India would buy 36 Rafale in a
government-to-government deal and that the discussions would have to be finalised
"rapidly". The French Minister of Defence visited India on 6 May to set up the bilateral
committee tasked with finalising the negotiations by the end of July. The contract could be
worth approximately EUR3bn for Dassault Aviation, in our view. The standard (F3 or F3-R)
is still to be announced and it is possible that an initial batch would be F3, upgraded to F3-
R at a later stage.
On 25 April 2015, China and Pakistan announced that China will supply 110 JF-17 aircraft
to Pakistan. We believe that this is likely to make India's purchase of Rafale aircraft all the
more pressing and reinforces the probability of a finalised deal coming soon (this assumes
that signs of the JF-17 deal did not push India to accelerate the Rafale purchase).
In our opinion, this unexpected announcement on 25 April will likely lead to the
cancellation of the 126-aircraft negotiations that have been underway between India and
Dassault Aviation since February 2012, after Dassault Aviation was selected as preferred
bidder in the "MMRCA" tender (Medium MultiRole Combat Aircraft). There has been no
formal statement that MMRCA has been dropped, but there is no mention that
negotiations are continuing. We believe that it is likely to be formally dropped once the
new Rafale contract is finalised.
The Economic Times of India stated (12 April, 14 April) that the MMRCA is all but
scrapped and will be replaced with a new agreement along the following lines:
■ The 36 Rafale will be manufactured in France: The initial MMRCA tender stipulated
that 18 aircraft would be procured from the selected country (in this case France) and
the remaining 108 could be assembled in India. Under the new agreement, the aircraft
will all be manufactured in France (potentially reducing the possibility of the order
being contested by competitors).
■ There will be options for more Rafale orders under the same conditions: This will
allow India to populate two squadrons with Rafale, leaving it short by 8 squadrons vs.
its stated strategic aim of having 42 squadrons. If India were to select the Rafale for
the remaining 8 missing squadrons, it would add 108 aircraft. Moreover, some 14
squadrons of Mig-21s and Mig-27s are due to be retired, leaving potential for more
orders.
■ Dassault Aviation is committed to supplying at least 30% of the contract value in
India: This compares with 50% in the MMRCA tender and could lead to some
resistance given that many commentators are likely to see this direct purchase running
contrary to the policy of "Make in India" advocated by Prime Minister Modi. Thales and
Safran have already set up joint-ventures with Indian companies and should be able
to meet these local supply targets. Dassault Aviation has stated it is preparing to
select its own partners, which may be seen as a condition for follow-on orders.
■ The option of potentially assembling the aircraft in India is likely to be
negotiated: We see this as opening the door for a licensing agreement or the creation
of a joint-venture for aircraft assembly, once the Indian industry is up to speed with
manufacturing the Rafale components, and could potentially begin to supply the 108
other aircraft required to reach the target number of squadrons. In essence, the
MMRCA deal would be cancelled but its spirit would remain.
Defence backlog at a historical high
We estimate that the sale to Egypt will add close to EUR2bn to Dassault's export order
intake for the year. Qatar will probably add another EUR2bn+ for the firm part. A formal
contract with India would add a further EUR3bn. The backlog would then reach a historical
high, close to EUR11bn.
28 May 2015
Dassault Aviation (AVMD.PA) 19
Figure 28: 2001-2020E defence backlog, order intake and
revenues in EURm, 2015E with Egypt, Qatar and India
Figure 29: 2001-2020E defence backlog, order intake and
revenues in % of group total
0
2,000
4,000
6,000
8,000
10,000
12,000
1996 1999 2002 2005 2008 2011 2014 2017E 2020E
Revenues Order intake Backlog
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
1996 1999 2002 2005 2008 2011 2014 2017E 2020E
Revenues Order intake Backlog
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Rafale production to increase in 2018
Production stability is assured. The main assumption behind growth is that India will sign
its contract in the next few months.
France production plans to change after the export orders
Dassault has received orders for 180 Rafale from France, with a remaining backlog of 43
at the end 2014. The five-year French budgetary framework (LPM: Loi de Programmation
Militaire) for 2014-2019 has been built with deliveries dropping from 11 in both 2014 and
2015 to 4 in 2016 and to 0 in 2017-2019 (15 in total for 2015-2019). These deliveries are
to be offset by export orders, with production continuing at a minimum pace of 11 Rafale
p.a.
Figure 30: Rafale orders from France in number of aircraft
Figure 31: Rafale deliveries to France – plans as they
stood before the export contracts in number of aircraft per annum
0
10
20
30
40
50
60
70
1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
0
2
4
6
8
10
12
14
16
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Deliveries 2014-2019 deliveries as per LPM
Source: Assemblée Nationale Source: Assemblée Nationale, Dassault Aviation
28 May 2015
Dassault Aviation (AVMD.PA) 20
8 of the 15 deliveries planned are naval versions of the aircraft and as such, cannot be
diverted to another customer (reinforced airframe for aircraft carrier use).
The export contracts signed and announced in 2015 will change the 2015-2019 delivery
plans for the French forces. Discussions are underway between the French government
and Dassault Aviation.
A production increase will be needed to absorb the three export orders
With 15 aircraft to produce for France between 2015 and 2019 and 84 to produce for
Egypt, Qatar and India, the current output of 11 per year is insufficient and will have to be
increased. We estimate that the overall lead time for an aircraft is two years. Also, it is
generally assumed that a three-year window is needed between an export order and the
start of deliveries during which customisation development work is needed. The F3-R
standard will not be available before H2 2018. Deliveries made before then will therefore
be in the F3 standard.
This implies that the final assembly will remain stable at 11 aircraft per year in 2015E and
2016E and that it might start to increase in 2018E. The overall achievable rate in the
current set-up is 2.5 aircraft per month, i.e., a little more than 30 per year (and maybe up
to 36), broadly a tripling of production vs. the current output.
We have assumed deliveries of about two aircraft per month starting in 2018E for the
export orders and no delivery for France between 2017E and 2021E:
■ Egypt: Dassault has indicated that the first three aircraft will be delivered in 2015 and
three more in early 2016 (which will come from the 11 produced in 2015). Deliveries of
other 18 (in the F3 standard) may be spread between 2016E and H1 2018E.
■ Qatar: Deliveries will start in mid-2018E at a pace of one aircraft per month (11 per
year), probably in the F3-R standard.
■ India: The Defence Minister indicated that the government is expecting to receive the
first aircraft 2-2.5 years after signing the contract, i.e., if the contract is signed by this
summer, in late 2017E or early 2018E. We have assumed a starting date in 2018 and
deliveries of 12 aircraft per year. A slower pace in 2018 could also be envisaged.
■ France: Assuming that (1) production remains at 11 aircraft per year until late 2017E
(with a few actual deliveries possibly slipping from one year to another), (2) no
increase in the LPM order is decided, and (3) none of the French aircraft on order is
postponed to the next LPM starting in 2020E, we believe that the 15 French deliveries
planned for 2015-19E will flow as such: 5 in 2015E, 10 in 2016E and 0 in 2017E.
The timing of the delivery of aircraft for India and Egypt is unclear and it is possible that
instead of delivering the Egypt orders, Dassault delivers aircraft to India first. This would
have no material impact on our forecasts, as we assume the 2016-19 unallocated
production goes to an export customer.
We have assumed that France does not receive any new Rafale deliveries before 2021E
after 2016E. The next LPM (2020-2025) will only be discussed in 2018-19 (after the
general election in 2017).
The pace of delivery of the Rafale is likely to go back to 11 aircraft p.a. once the export
orders are exhausted. There were 43 outstanding orders for France at end-2014, with 15
scheduled deliveries. The French force structure calls for another 45 aircraft, or a total of
73 yet to be delivered beyond 2020, or 6.5 years' worth of production. This does not take
into account any further orders, for Qatar for instance (if the +12 options are exercised).
28 May 2015
Dassault Aviation (AVMD.PA) 21
Figure 32: Our delivery forecast in number of Rafale deliveries
0
5
10
15
20
25
30
35
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
France Egypt Qatar
India LPM 2014-2019 Minimum production rate
Installed capacity
Source: Company data, Assemblée Nationale, Credit Suisse estimates
Further export potential for the Rafale
The current installed capacity for the Rafale is 2.5 aircraft per month, i.e., 30 p.a. (and with
some additional room to rise slightly above that level, to possibly 36). This leaves some
room to accommodate new contracts, in our view.
Rafale is being or could be offered in several other campaigns, which include the UAE,
Kuwait, Indonesia, Malaysia, Switzerland and Belgium. There will be other tenders in
which we think the likelihood of Rafale being considered are limited: ie, Poland, Canada,
Finland.
Figure 33: Our view of Rafale winning orders in ongoing or upcoming campaigns
Number of aircraft Order size (EURbn) High chances Balanced chances Lower chances
UAE 60 4.7
Kuwait N/A 1.4
Indonesia 16 1.2
Malaysia 16 1.2
Belgium N/A
Switzerland 18-24 1.4
India 108 7.8
Source: Credit Suisse research
We note that President Obama commented at the Camp David summit on 14 May 2015
that there would be no sale of the stealth fighter F-35 to Gulf countries. We link this to the
sale of the F-35 to Israel and the US legal commitment to ensure QME (Qualitative Military
Edge) for Israel. This offers some further manoeuvring room for the Rafale or the Typhoon
in Gulf countries, in particular in the UAE, in our view.
UAE (60 aircraft) – a good opportunity for the Rafale, but timing is unclear
The UAE currently operates F-16s and around 60 Mirage 2000s. In 2013-2014, it
announced the decision to order 30 more F-16s, but this has yet to be finalised. The UAE
also ran a tender in 2011 for the replacement of its Mirage 2000s (with fierce competition
between the Rafale and the Typhoon), but it bore no fruit and appears to have been
suspended after the UAE stated that Dassault's offer was not acceptable. It also dropped
an offer from BAE for the Typhoon. Defense News indicated that talks had restarted with
France (19 April 2015). It is unclear whether there is an active tender being discussed at
the moment or if these are simply general discussions. The strong political ties between
28 May 2015
Dassault Aviation (AVMD.PA) 22
France and the UAE would place the Rafale well in any competition. The UAE is said
(source: Defense News, 17 January 2015) to be ready to sell some 10 Mirage 2000-9s to
Iraq, which would open the door to a Rafale procurement.
Malaysia (16) – a strong French position
Malaysia has been looking for 16 aircraft to replace its Mig-29. France is the first supplier
of military equipment to Malaysia and has sold submarines, helicopters, and A400Ms.
France is said to have offered Malaysia a 10-year commercial loan to fund the purchase of
the Rafale (Jane's Defence Weekly, 18 March 2015). Dassault indicated that it could offer
to set up the final assembly line for the aircraft, production of parts and maintenance-and-
support work in Malaysia.
The Rafale competes against the Typhoon, the F/A-18 E/F, the Gripen and the Su-30.
Kuwait – a possible F/A-18 buy makes a Rafale purchase unlikely
Kuwait has been said (Reuters, 18 May 2015) to be looking at buying 18-22 aircraft and
that it would likely follow the lead of the UAE on which aircraft to choose (as Bahrain would
do with Saudi Arabia and the Typhoon). However, a deal with the US appears likely, with
press reports (e.g., Reuters, 7 May 2015) indicating that an order for 28 F/A-18 E/F was
about to be announced. This would reduce the likelihood of a Rafale purchase (or
Typhoon, which is also in the running) for the moment.
Indonesia (16) – an offer derailed by political tensions?
Indonesia has an on-going tender for 16 aircraft and France has recently built strong
defence ties with Indonesia (through the sale of small vessels, missiles, helicopters, and
howitzers). In March, France offered a technology transfer to the country, were it to select
the Rafale. However, the recent political tension between France and Indonesia (source:
Reuters) may make it difficult for both countries to find an agreement.
The competition also includes the Russian Su-35, the F-16, the Gripen, and the Typhoon,
with the Indonesian airforce said to prefer the Su-35 (Jakarta Post, 26 March 2015).
Belgium – initial RFI just launched
Belgium has launched a request for information to replace its F-16s. The number of
aircraft is not yet defined. In 2014, the Rafale team opened an office in Brussels to support
its participation in the upcoming programme.
The Dassault group has strong ties with Belgium, with a 53.3% stake in SABCA and
several of its assets are carried via its Belgian subsidiary. Since 2004, French and Belgian
pilots have been trained together for fighter aircraft, transport aircraft and helicopters.
The likely competitors will be the F-35, the F/A-18 E/F, the Typhoon and the Gripen.
Switzerland – new tender to be launched soon
The Swiss Minister of Defence said on RTS in late April that Switzerland would be getting
ready to launch a new tender to replace it F-5s in 2017. A first tender for 18-24 aircraft
proposed the Typhoon, the Rafale and the Gripen, with the selection of the latter in 2011.
A referendum stopped the deal in 2014, with most opposition seemingly centred on costs.
A new competition, according to the Swiss government, would include only the Rafale, the
Gripen and the F/A-18 E/F.
The French offer included some attractive and innovative items, such as joint training and
sharing of spare parts with the French Air Force, in a bid to offset its likely unit cost
disadvantage with the Gripen.
India – more aircraft needed
India has a need for more aircraft, with the upcoming retirement of its 14 squadrons
operating Mig-21s and Mig-27s starting in 2017. It is possible that they opt for lighter
aircraft (either the indigenous Tejas or possibly the Gripen).
28 May 2015
Dassault Aviation (AVMD.PA) 23
As mentioned earlier in the report, India also needs another 108 medium aircraft, as it is 6
squadrons short of its strategic target. It is possible that this would follow the creation of a
joint-venture for local joint production (Economic Times of India, 3 May 2015).
Combat aircraft competitors
Thanks to the three contracts announced in 2015, the Rafale has moved from the bottom
of export orders for modern Western combat aircraft to a level just below that of the
Typhoon. Rafale exports now account for nearly one-third of Dassault's total sales, a level
well above that of its current competitors (Typhoon, F/A-18 E/F and Gripen).
Figure 34: National orders for modern European and US
programmes in number of aircraft
Figure 35: Export orders for modern European and US
programmes in number of aircraft, rhs: Export as a % of total sales
0
500
1,000
1,500
2,000
2,500
F-3
5
F-1
6
F-1
5
F/A
-18
F/A
-18
E/F
Tor
nado
Typ
hoon
Mira
ge 2
000
Grip
en
Raf
ale
US Europe
0%
10%
20%
30%
40%
50%
60%
0
500
1,000
1,500
2,000
2,500
F-1
6
F-3
5
F-1
5
F/A
-18
F/A
-18
E/F
Mira
ge 2
000
Tor
nado
Typ
hoon
Raf
ale
Grip
en
US Europe
Export as % of total sales
Source: Company data – current DoD estimates for the F-35 Source: Company data – Lockheed Martin estimates for the F-35
In international tenders, the Rafale will usually compete with US (F-35, F-18 E/F, F-15, F-
16), Russian (Su-30, Mig-29, Mig-35) and European aircraft (Typhoon, Gripen). We
provide quick reference tables comparing the Rafale with some of its competitors.
Figure 36: European fighter aircraft / industry matrix
Previous generation Current generation Trainers
Mirage 2000 Tornado Rafale Typhoon Gripen Hawk M-346
Country France UK, Germany,
Italy
France UK, Germany,
Italy, Spain
Sweden UK Italy
Dassault Aviation 100% - 100% - - - -
BAE Systems - 42.5% - 33% - 100% -
Airbus - 42.5% - 46% - - -
Finmeccanica - 15% - 21% - - 100%
Saab - - - 100% - -
Engines Safran Rolls-Royce,
MTU, FiatAvio
Safran Rolls-Royce,
MTU, GE, ITP
GE Rolls-Royce Honeywell,
AIDC, GE
Electronics Thales, Safran BAE Systems,
Airbus,
Finmeccanica
Thales, Safran BAE Systems,
Airbus, Indra,
Finmeccanica,
Elettronica
Saab,
Finmeccanica
BAE Systems,
Finmeccanica
Finmeccanica
Source: Company data
28 May 2015
Dassault Aviation (AVMD.PA) 24
Figure 37: Rafale vs. Typhoon, Gripen and F/A-18 E/F – orders and deliveries
in number of aircraft, as at 31 December 2014 for deliveries
Rafale Typhoon Gripen F/A-18 E/F
Super Hornet
Programme nations France UK, Germany,
Italy, Spain
Sweden US
National orders 180 472 278 698
Past national deliveries 137 428* 204 630
Outstanding national deliveries 43 72 74 68
Export countries Egypt-24, Qatar-24, India-
36 (under negotiation)
Saudi Arabia-72,
Austria-15, Oman-12
South Africa-26,
Thailand-12, Brazil-36
Australia-36
Export Orders 84 99 74 36
Past export deliveries 0 60 32
Outstanding export deliveries 84 39 36
Export as a % of total sales 32% 17% 27% 6%
Source: Company data - * +14 awaiting customer acceptance
Figure 38: Rafale vs. Typhoon, Gripen and F/A-18 E/F – key characteristics and capabilities
Rafale Typhoon Gripen NG F/A-18 E/F Super
Hornet
First flight 1986 1992 1988 1995
First delivery 1998 2003 1997 (C/D version) 1998
Status In service In service NG version in
development
In service
Specifications
Empty weight (t) 9.5 11.0 8.0 14.6
Max weight (t) 24.5 23.5 16.5 29.9
Number of engines x2 x2 x1 X2
Thrust (lb) 16,900 x2 20,000 x2 22,000 x1 22,000 x2
Capabilities
Payload (t) 9.5 7.5 5.1 8.0
Number of weapon hardpoints 14 13 10 11
Number of heavy hardpoints 5 3 3 3
Max range (air-to-surface mission) (km) 1,850 1,400 1,500 720
AESA radar
Missions (: in service : planned / in development : not planned)
Air-to-air
Ground attack (bombs)
Air strike (cruise missiles)
Anti-ship
Reconnaissance
Nuclear strike
Naval version
Source: Company data – Rafale C for specifications; Gripen NG for specifications
Purchase decision drivers
We believe that purchase decisions in combat aircraft are driven first by political factors,
then by military operational needs and lastly by economic consideration:
■ Political factors: Buying a front line aircraft implies that the buyer trusts that the seller
will support the aircraft for the whole of its operating life, which will spread over 30-50
years. In particular, the buyer will want to minimise the risk of seeing the sale of spare
parts being embargoed for political reasons.
■ Military operational needs: The aircraft are purchased for military purposes, which
defines what characteristics are required. Combat aircraft can be defined by the
mission they can accomplish, in terms of capabilities (weapons), range and the threat
environment in which they can operate. Other key features include on-board radar and
28 May 2015
Dassault Aviation (AVMD.PA) 25
electronic systems, the number of engines, and speed, for example. A light single-
engined aircraft might be sufficient to patrol an unchallenged airspace. A heavier
aircraft with more carrying capacity and high-end defensive capabilities would be
needed for strike missions in a foreign country with good air defence systems.
■ Economic considerations: We see two types of economic considerations: the cost
for the buyer and the industrial offsets that it may generate. The cost consists of the
purchase price and life cycle costs. Cost comparison is a source of much discussion
and there are no easy answers. Cost drivers include development costs to be
amortised, sophistication of the aircraft, and volumes produced. Life cycle costs
include not only operational costs for the 30-50 years of the aircraft life, such as fuel
burn and other elements of the flight hour cost, but also heavy maintenance, training,
upgrades, among others. These costs will rise with the aircraft size and its
sophistication. Industrial offsets will allow the buyer to have local content, generating
jobs and technological know-how. It could also be seen as one way to reach a
political objective, by locating some of the support capabilities for the aircraft in a
particular country.
28 May 2015
Dassault Aviation (AVMD.PA) 26
Falcon revenues to grow again from 2017 We expect Falcon revenues to increase from EUR2.7bn in 2014 to EUR3.8bn in 2018E
and to EUR4.5bn in 2020E. Falcon deliveries should be broadly unchanged in 2015-16 vs.
2014, reflecting market share losses in recent years, as the market turned to very long
range aircraft, which are absent from Dassault's portfolio. The current softness of the
business jet market in Brazil, Russia and China will likely translate into a rather muted
order intake. However, we think that Dassault will benefit from (1) some delivery growth in
the wake of the new Falcon 8X and 5X models entering in service in 2016 and 2017,
respectively, (2) an increase in the average delivery price and (3) the weakening of the
euro vs. the US dollar (as almost all Falcon sales are in US dollars).
Softening of growth in the business jet market
The high-end business jet market has been rebounding since 2012, after the trough that
followed the 2008-09 global financial crisis. The lower tiers of the market only returned to
growth in 2014. The level of used aircraft available for sale is back to average levels,
supportive of further market expansion.
Looking forward, the underlying market looks set for slower growth in 2015 vs. 2014.
Indeed, we see the US continuing on a slow recovery path. In China, growth in new
deliveries is likely to be subdued as the market transforms after a phase of strong
expansion due to new local conditions (fiscal and political). Brazil's economic troubles are
likely to slow the order inflow In Latin America. Sanctions against Russia are also taking
their toll on this market. Fractional ownership companies are unlikely to come back to the
market unless growth accelerates.
The high-end market continued its post-crisis rebound in 2014
Deliveries of high-end business jets (which we define as super mid-size, large and long
range) rose by 9% in 2014, after a 20% jump in 2013. Deliveries reached 423 units, just
above its previous peak of 415 (2008).
Figure 39: Growing high-end business jet market Deliveries in number of aircraft, super mid-size, large and long range
0
50
100
150
200
250
300
350
400
450
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Dassault Hawker Bombardier Cessna Gulfstream
Source: GAMA
As a result of Dassault outpacing the lower tiers of the market, the higher end now
accounts for 50% or more of deliveries, up from 30% in the late 2000s.
28 May 2015
Dassault Aviation (AVMD.PA) 27
Figure 40: The high-end market now represents more than
50% of business jet deliveries in number of aircraft delivered
Figure 41: The business jet market cycle driven by the
lower end of the product range in number of aircraft delivered
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Light / Super light Mid-size
Super mid-size Large / Long Range
Commercial aircraft derivatives
0
200
400
600
800
1,000
1,200
1,400
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Light / Super light Mid-size
Super mid-size Large / Long Range
Commercial aircraft derivatives
Source: GAMA data, Credit Suisse calculations Source: GAMA data, Credit Suisse calculations
The fleet for sale is back to the pre-crisis level
Buyers of new jets often need or want to resell their current aircraft before buying a new
one. The liquidity of the used aircraft market is therefore a key enabler of new aircraft
sales. An availability rate of around 10% for a given aircraft type is generally seen as
indicative of market balance.
The level of used aircraft available for sale appears to support market expansion. The
2009 financial crisis took that number from 11-12% of the total fleet in service to 18%+. It
then gradually fell back to a pre-crisis level of 11.3% at the end of March 2015 (slightly up
vs. 11.1% in December 2014). Part of the absorption of these aircraft had been driven by
the expansion of the Chinese market, which may have paused following the slowdown in
China.
Figure 42: The fleet for sale is back to a pre-crisis level Number of aircraft available for sale in % of the total fleet in service, all business jets
6%
8%
10%
12%
14%
16%
18%
20%
0
500
1,000
1,500
2,000
2,500
3,000
Jan-90 Nov-92 Sep-95 Jul-98 May-01 Mar-04 Jan-07 Nov-09 Sep-12
used aircraft for sale Used aircraft for sale as a % of the active fleet
Source: Jetnet
28 May 2015
Dassault Aviation (AVMD.PA) 28
Slow rebound of the North American market
The US market accounts for above two-thirds of the world business jet fleet. It is largely
driven by general economic trends. It has been slowly picking up after the collapse that
followed the 2008-2009 financial crisis. Financial constraints have been a key reason for
this collapse, highly correlated to the general economy. This was compounded by the fact
that corporate jets were seen by the general public as a demonstration of corporate
lavishness. We are now far from the furore about US car manufacturers being bailed out
by the US government while their executives were travelling on business jets. However, it
is unclear if the image of business jets has materially improved and become acceptable
again.
We expect this slow expansion to continue, driven by US economic growth. However, we
also believe that the US market continues to be held back by the cautious stance of US
companies vis-à-vis the use of business jets and to some degree due to underutilisation of
the existing fleet (as highlighted by flight hours not having reached their pre-crisis level
yet).
Figure 43: Deliveries by region in number of business jets
Figure 44: North America accounts for the largest part of
the global fleet in number of business jets (c.19,000), March 2015, by region of ownership
0
200
400
600
800
1,000
1,200
1,400
2007 2008 2009 2010 2011 2012 2013 2014
North America Europe Asia-Pacific Latin America Middle East
North America70%
Europe12%
Asia Pacific8%
South America7%
Africa3%
Source: GAMA Source: Jetnet
The GAMA trade association expects flight hours in the US to grow 4.2% p.a. over the
next 10 years. We note that the number of flights and flight hours have not yet recovered
to the pre-2009 crisis level. This does not point towards significant growth for the business
jet market in the US.
28 May 2015
Dassault Aviation (AVMD.PA) 29
Figure 45: A slow recovery of flight hours/flight
operations in the US Flight hours (x1,000) and number of flights (x1,000)
Figure 46: A small pick-up of pace in 2014 Change in %
0
1,000
2,000
3,000
4,000
5,000
6,000
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Flight hours Operations - rhs
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
2002 2004 2006 2008 2010 2012 2014 2016E 2018E 2020E
Flight hours Operations
Source: GAMA for flight hours, FAA for operations Source: GAMA for flight hours, FAA for operations
A pause in China's growth
The Chinese market has been seen by business jet manufacturers as highly promising,
with a low equipment level and significant potential based on its economic growth. Based
on numbers from the industry consultants, Asian Sky Group, we calculate that China
(including HK) accounted for 9% of global deliveries in 2013 and 2014. This is consistent
with GAMA trade association data for Asia, which indicate that Asia in total is just above
10% of world registrations (up from 5% in 2008).
Two long-term hurdles are traditionally seen as preventing the sector from developing in
China: (1) the lack of appropriate infrastructures (dedicated airports and FBOs) and (2)
airspace constraints derived from tight military control. Both have been slowly relaxed
since the early 2010s and this has translated into strong market growth. These market
needs have been met with both new and used aircraft.
However, the Chinese market may have peaked in 2014 and could now go see a slower
pace of growth. The tone of the Asian business jet airshow, which took place in mid-April
2015, appeared rather subdued, in our view. For instance, the Asian Sky Group
commented in AviationNow (14 April 2015) that the market was being held back by (1)
high VAT (23-24%), (2) the closure of tax loopholes for aircraft leasing, (3) the slowdown
of the Chinese economy, (4) the anti-corruption crackdown and (5) austerity campaigns
(with government officials no longer being allowed to rent business jets). It also indicated
that there are 30 aircraft available from specialised leasing companies in China, which will
cap sales from the OEMs. Some of the registrations could go offshore to avoid the added
constraints, but the transition could take some time.
Other markets
The European market appears resilient, despite the negative impact of the sanctions
against Russia and the conflict in Ukraine. Aviation Week reports (20 May 2015) that
business jet YTD traffic is down by a third between Germany and Russia and by 26%
between Russia and France.
In the Middle East, the lower oil price might reduce local buying power, but there has been
no sign of that for the moment. Africa has been strong in 2014, for instance in Nigeria.
Latin America has been hurt by the economic slowdown and the Petrobras corruption
scandal in Brazil.
28 May 2015
Dassault Aviation (AVMD.PA) 30
Q1 2015 looks soft across the business jet sector
Q1 2015 data confirm this muted growth environment. Bombardier, Cessna, Embraer and
Gulfstream all reported some softness in key markets: Latin America, Russia and China.
Slow business jet flight operations in Q1 2015 in the US
2015 has had a slow start in the US, with flat business jet operations over January-March
(+1.2%). We believe this can be explained partly by unsupportive weather.
Figure 47: A slow start for business jet operations in Q1 2015 in number of flights
200,000
250,000
300,000
350,000
400,000
450,000
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2007
2008
2009
2010
2011
2012
2013
2014
2015
Source: FAA
Business jet manufacturers in Q1 2015
There were no signs of strong market strength in business jet manufacturers' (Cessna,
Gulfstream, Bombardier and Embraer) Q1 reporting. They all pointed to softness in Brazil,
China and Russia, with some limited growth in the US.
Cessna (owned by Textron) reported disappointing deliveries in Q1. The CEO of Textron
recently commented that maybe demand in the large cabin business jet segment of the
market is now losing steam as countries such as Russia and China have accounted for an
inordinate share of its high growth in recent years. Cessna also indicated that there is little
perceived need for imminent development of a very long-range jet to compete with the
G550 / 650 or Falcon products. Textron - CEO Meeting - More room on Bell savings;
Balance sheet unlikely to lie dormant (10 May 2015)
Gulfstream (owned by General Dynamics) came in light of our US team's expectations in
terms of Q1 Aerospace sales, despite good levels in services. GD indicated that
contracting for new orders is slow, but not different from recent periods. Geographically, it
sees North America and the Middle East holding up while Russia, Latin America and
China are slower. The company also commented that growth will return when the new
airplanes enter into service, something which we also see for Dassault Aviation. The G650
is now sold out until Q4 2017. General Dynamics - Strong Q1; Q2 Should Bring Guidance
Boost (29 April 2015)
As highlighted by our US analyst Rob Spingarn, Bombardier said in its Q1 conference call
that it is going to trim production rates for the Global 5000/6000 to better align with
demand (as a result of seeing softness in Latin America, China and Russia). This was
confirmed on 14 May, together with a redundancy plan. Aviation Week (19 May) reported
that the group also acknowledged some competitive pressure coming from the new
28 May 2015
Dassault Aviation (AVMD.PA) 31
products from Gulfstream (G650ER) and Dassault Aviation (Falcon 8X). Bombardier -
Once again, more questions than answers (7 May 2015).
Embraer had a particularly weak Q1, missing five business deliveries, some of which were
due to supply chain issues. However, it had a strong level of services and spare part sales
(typically 10% of business jet sales, 24% in Q1, with a positive margin impact). The
company noted that China and Brazil have slowed down, offsetting the continuing but not
substantial recovery in the US.
Dassault to rebound thanks to its rejuvenated
product range
Despite this soft market context, we expect Dassault Aviation to catch up with its peers
after a few years of market share losses (which we believe were due to product positioning
and probably also a lack of orders from Netjets).
A key driver of this catch-up will be the entry in service of the two new models of the
group, Falcon 8X and Falcon 5X, which should help close some of the product gaps (very
long range with the Falcon 8X) and, to a certain extent, replace the Falcon 900 (Falcon
5X).
Market share decline for Dassault Aviation
At the high end where the company competes (super mid-size, large and long range
segments), Dassault Aviation's market share has weakened to 15% of deliveries in 2014,
its lowest for the past 20 years. Market share over 2010-2014 was 20%. The 2010 peak
(30%) was explained by delivery catch-ups deferred from 2009.
Figure 48: A market share decline for Dassault since the 2010 peak % of the deliveries in number of aircraft, super mid-size, large and long range
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Dassault Bombardier Gulfstream Cessna
Source: GAMA, Credit Suisse calculations
For instance, it would appear that Dassault Aviation only delivered nine new aircraft in
China in 2014 vs. 14 in 2013, while the Chinese high-end market has risen from 48 to 58
aircraft (Asian Sky Group data, in the 2014 Asia Pacific business jet fleet report), to about
20% of the total high-end global market.
We have defined the high-end market as the combination of the following segments: super
mid-size, large and long range. We believe that these will be the segments Dassault
Aviation customers will look at when considering a business jet purchase for their needs.
Different calculations can be made, for instance by removing the very long range segment
from its addressable market, as Dassault does not compete in that area.
28 May 2015
Dassault Aviation (AVMD.PA) 32
Figure 49: Business jet market segmentation in millions, unless otherwise stated
Learjet
60 XR
Learjet
70
Learjet
75
Learjet
85*
Challenger
300
Challenger
605
Challenger
850
Global
5000
Global
6000
Global
7000
Challenger
350
Global
8000
Mustang CJ2+ CJ4 XLS+ LatitudeSovereig
n+Citation X+ Longitude
M2CJ3 /
CJ3+
Dassault
Aviation
Falcon
2000S
Falcon
2000LXS
Falcon
900LXFalcon 7X Falcon 8X
Falcon 5X
Phenom
100
Phenom
300
Legacy
450Legacy 500 Legacy 600
Lineage
1000
Legacy 650
Gulfstream G150 G280 G450 G550 G650
G500 G600 G650ER
Hondajet PC-24ACJ
318/319
Eclipse
550BBJ 1/2/3
Bombardier
Very Light Light Medium LargeLarge Corporate
Airliners
Cessna
Embraer
OthersBBJ Max
7/8
In development In Production * Programme paused Source: Credit Suisse research, adapted from Bombardier data
Dassault's competitors (Gulfstream, Bombardier) have better captured the high-end
market growth in 2013-14 thanks to new product additions to their portfolios made in
previous years.
In particular, most of the growth has been captured (or generated) by Bombardier's Global
6000 (for which production has increased from 50 in 2012 to 80 in 2014 – probably as a
way to generate as much cash as possible to fund the CSeries development) and
Gulfstream's G650, the aircraft with the longest range on the market (>7,000 nm).
Figure 50: Gulfstream's G650 accounting for >20% of large / very long range jet
deliveries in number of aircraft built
0%
5%
10%
15%
20%
25%
0
10
20
30
40
50
60
2009 2010 2011 2012 2013 2014
G650 As a % of large jets deliveries - rhs
Source: Ascend, GAMA, Credit Suisse research
28 May 2015
Dassault Aviation (AVMD.PA) 33
Order intake rebound in 2014 for Dassault Aviation after a slow 2009-13
After two years in negative territory (2009-2010) and three more years (2011-13) below
1.0x, the book-to-bill order intake at Dassault started to pick up in 2014 in part driven by
orders (not quantified) for the new Falcons 8X and 5X. As a result, the book-to-bill (in
number of aircraft) reached 1.4x in 2014 (vs. 0.8x on average for 2011-2013).
Figure 51: Orders and backlog in number of aircraft
Figure 52: Book-to-bill and backlog in years of production In number of aircraft
-200
-100
0
100
200
300
400
500
600
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Orders Backlog
-4.0x
-2.0x
0.0x
2.0x
4.0x
6.0x
8.0x
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Years of production in backlog Book-to-bill
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
When Dassault launched the Falcon 7X in 2001, its most successful programme, order
intake rose fast after the first flight (2005) and the book-to-bill stayed at 2.4x and above for
three years from 2005 to 2008.
Reducing a gap in the product line on very long range aircraft
We believe that Dassault Aviation has been penalised by a product range not fully aligned
with the areas of highest growth in the market, i.e., the very long range segment (6,500nm
and beyond). The launch of the Falcon 8X is set to modify this (6,500nm range) and to
allow the group to catch-up on Gulfstream and Bombardier on very long range aircraft.
Aviation Week reported on 19 May 2015 that Bombardier acknowledged that competitive
pressure in a softer market was a factor in its decision to reduce rates on the global family.
The main fundamental drivers for the business jet segment include the benefits derived in
terms of (1) security (all passengers are known), (2) confidentiality (discretion while
conducting business), (3) versatility and flexibility (can visit several plants in one day, flight
schedule totally controlled, access to many secondary airports), (4) speed (reduction of
the travel time) and (5) comfort (in particular for long flights).
In the past 10 years, the main driver in the high-end market has been the globalisation of
the world economy, with large international firms buying business jets as productivity tools
for their management (for instance, Falcon 7Xs for Volkswagen and Shell). As a result,
increased range has been a major enabler, allowing corporations to more seamlessly link
their global operations. It would appear that the market has been centred on the very long
range aircraft priced at USD60m or more, a segment in which Gulfstream's G650 leads
and from which Dassault has been absent.
Now that the Falcon 8X and 5X aircraft are commercially launched, we expect a catch-up
of orders for Dassault Aviation. We note that the order intake on the Falcon 7X
significantly accelerated after the initial flight in 2005. We expect something similar to
happen now that the first flight of the Falcon 8X has taken place (6 February 2015) and
appears to have met expectations. Despite this engine delay, the Falcon 5X first flight is
28 May 2015
Dassault Aviation (AVMD.PA) 34
still expected in mid-2015. Dassault is still reviewing the consequences for the overall
programme schedule.
Figure 53: A gap in Dassault Aviation product range at the top end of the market List prices (USDm - vertical) vs range (nm - horizontal)
Global 7000
Global 8000
G650ERG650
Global 6000 G550
Falcon 8X
G600Falcon 7X
Global 5000
Falcon 5XG500
Falcon 900LX
G450
Falcon 2000LXS
G350Falcon 2000SChallenger 650
Challenger 350G280
20
30
40
50
60
70
3,000 4,000 5,000 6,000 7,000 8,000
Dassault Aviation programme
In production aircraft
Aircraft in development
Long Range / Very Long Range
Source: B&CA, company data
The extended range of the Falcon 8X will put New York City within reach of Shanghai,
something which the Falcon 7X could not do. This will possibly reinforce the attractiveness
of the Falcon 8X on the Chinese market, for which it appears to be well positioned.
However, this will remain well below the range of Bombardier's Global 8000, for which
essentially only South America is beyond reach, as illustrated in Figure 54 and Figure 55.
Figure 54: Falcon 7X, Falcon 8X range map accessible countries / cities at max range from Shanghai
Figure 55: Bombardier's Global 8000 accessible countries / cities at max range from Shanghai
Shanghai
Falcon 8X
Falcon 7X
Source: Company data, GoogleMaps @ 2015 Google Source: Bombardier
Dassault absent of NetJets' expansion
A significant part of the US market comes from fractional ownership companies, such as
Berkshire Hathaway's NetJets. NetJets accounts for about 2% of the world's business jet
active fleet, with around 500 aircraft in service and 250 more on order. It does not appear
to be very active in the market after a wave of orders in 2011-12.
NetJets has been a large customer of Dassault Aviation's Falcon 2000. But it opted for the
global family for its long range aircraft (2011-12) and, as a result, Dassault missed the last
bout of NetJets' expansion after the crisis. The absence of this high-volume customer has
been negative for the market share, but positive for the mix of deliveries. The arrivals of
28 May 2015
Dassault Aviation (AVMD.PA) 35
the Falcons 5X and 8X on the market may trigger some orders from NetJets, probably for
the 5X as it already has some long range aircraft (with ongoing orders for Bombardier's
global family).
Figure 56: NetJets' fleet by airframer in number of aircraft, in service and on order
Figure 57: NetJets fleet by category and airframer Categories as defined by NetJets
0
50
100
150
200
250
300
350
Citation Encore /
Encore +
Citation
SovereignCitation X
Citation XLS /
Excel
Embraer Phenom 300
Hawker
Beechcraft900XP / 800XP
Dassault
Aviation
Falcon 2000EX /
2000
Gulfstream G200 G450/GV
Challenger 350 Challenger 650
Global 5000
Global 6000
Large
Bombardier
Cessna
Light MidsizeSuper
Midsize
Source: Ascend Source: Company data
Falcon deliveries to grow after 2017
Dassault Aviation has indicated that it expects to deliver 65 aircraft in 2015, essentially flat
vs. 2014. We understand that some of these aircraft were in inventories at the end of the
year (with finished goods inventories jumping EUR200-300m from historical levels,
implying 5-8 aircraft held in stock). This might provide some upside potential to the
delivery target. Q1 was poor (see below Figure 59), but this is not necessarily
representative of a full-year trend.
A rebound driven by the new Falcons
The rebound in orders in 2014 (which we expect to continue in 2015) should lead to a
pick-up in deliveries with a two-year lag, starting with the entry in service of the Falcon 8X
(mid-2016) and the Falcon 5X (2017). Assuming a progressive ramp-up of the new aircraft
and a controlled decline of the older aircraft in a supportive business jet market, deliveries
could reach 85-90 aircraft per annum by the end of the decade (+30% vs. 2014). We
expect deliveries to remain broadly flat until 2017.
This is based on our assumption that the high-end business jet market does not
experience a sharp decline. We believe that the current softness in China, Russia and
Brazil will hold back order intake, but that it should be offset by the EIS of the new models.
We see this volume increase as consistent with the 25% extension of the group's footprint
in Little Rock, launched in September 2014 for a USD60m investment. The new
installations should be ready in early 2016, in time for the first deliveries of the Falcon 8X
mid-2016E.
28 May 2015
Dassault Aviation (AVMD.PA) 36
Figure 58: Deliveries expected to rise with the entry in service of the new Falcon programmes In number of aircraft
0
10
20
30
40
50
60
70
80
90
100
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Falcon 50 Falcon 2000 Falcon 900 Falcon 7X Falcon 8X Falcon 5X
Source: GAMA, Credit Suisse estimates
Falcon deliveries at a 10-year low in Q1 2015
Dassault no longer discloses quarterly revenues. Based on GAMA data, Q1 2015 has
been extremely soft with only six deliveries, the lowest since 2005 (five delivered). The
company has indicated that quarterly deliveries are not representative of an annual trend
and that H1 will be lower than H2 in 2015, due to delivery phasing. It does not seem to be
the result of production/completion issues or customer deferrals.
Figure 59: Q1 2015, the worst quarter in terms of deliveries since 2005 Quarterly deliveries in number of aircraft
0
5
10
15
20
25
30
35
40
Q1 Q2 Q3 Q4
2009 2010 2011 2012 2013 2014 2015
Source: GAMA
28 May 2015
Dassault Aviation (AVMD.PA) 37
Moderate expansion of services Services activity is derived from business jet and combat aircraft maintenance (including
spare parts and support), upgrades of military aircraft and trade-ins of used business jets.
As a result, the division generally trends in line with the evolution of Dassault's business
jets (2,050 aircraft) and combat aircraft (1,000) fleet and their utilisation.
Dassault Aviation does not provide a detailed breakdown of services revenues. We
estimate that 15-20% of the Falcon business is non-OE (c.EUR500m in 2014E), including
trade-ins. All of the defence export revenue in 2014 (EUR225m) was services and, in
France, some EUR200-300m p.a. in Defence revenues relate to services/upgrades, in our
view. In total, we estimate that services account for c.25% of group sales.
We see a moderate increase in flight operations for the business jets (the strong growth of
the recent models being offset by the decline of the older generation), although this is
below market levels. On the defence side, we expect a broadly stable situation, with
possibly a short-term spike due to current military operations in the Middle East.
Moderate growth in Falcon support revenues,
increase in trade-ins
The group indicated in the past that services activity accounted for 15-20% of its Falcon
revenues (including trade-ins). As is traditional for airframers, spares are likely to
represent some 5% of revenues, in our opinion.
We expect a moderate increase in support revenues, as the older generation of aircraft
sees a decrease in flight hours and some retirements, mitigating the good growth seen for
the younger fleet.
We also expect an increase in trade-ins, the reluctance of Dassault to enter into such
agreements being offset by the need to smooth the transition to the new models (in the
context of a not-fully recovered used aircraft market).
The Falcon fleet has been expanding steadily
At the end of March 2015, Dassault Aviation's active fleet was about 2,050 Falcons (i.e.,
c.10% of the global business jet fleet). 25% of the fleet was Falcon 2000s and 25% was
Falcon 900s. The more recent Falcon 7X accounts for around 12%. The rest of the fleet is
made up of older platforms (Falcon 50, 20 and 10) and accounts for 37%.
28 May 2015
Dassault Aviation (AVMD.PA) 38
Figure 60: Dassault's in-service fleet evolution in number of aircraft, fleet at March 2015
Figure 61: Dassault Aviation's fleet by aircraft type in number of aircraft, 2,052 aircraft as at March 2015
9.5%
10.0%
10.5%
11.0%
11.5%
12.0%
1,300
1,400
1,500
1,600
1,700
1,800
1,900
2,000
2,100
Jan-05 May-06 Sep-07 Jan-09 May-10 Sep-11 Jan-13 May-14
Falcon fleet As a % of global fleet - rhs
Falcon 200026%
Falcon 90025%Falcon 7X
12%
Falcon 10/1007%
Falcon 20/20014%
Falcon 5016%
Source: Jetnet Source: Company data
Dassault's fleet has expanded at a 3% CAGR over the past 10 years. This is slower than
the overall business jet market (+8%), which benefited for a few years from the arrival of
very light jets in large numbers (Mustang, Premier and Eclipse 500). Excluding these, the
global fleet has grown by 4%.
Most of the fleet is located in the US and Europe
A large part of the fleet is located in the US (64% of the fleet).
Figure 62: Dassault Aviation's fleet by geography in number of aircraft, by region of operations, as at March 2015
Figure 63: Dassault Aviation's fleet vs. global fleet in number of aircraft, by region of operations, as at March 2015
North America64%
Europe22%
Asia Pacific7%
South America4%
Africa3%
0%
10%
20%
30%
40%
50%
60%
70%
80%
North America Europe Asia Pacific South America Africa
Falcon All business jets
Source: Jetnet data Source: Jetnet data
A mature fleet
Maintenance activities are driven by the steady ageing of the fleet. Its average age of
nearly 20 years makes it a mature fleet, which generates a steady flow of spares and
maintenance activities, which are aligned with the number of flight hours flown.
28 May 2015
Dassault Aviation (AVMD.PA) 39
Figure 64: In-service fleet by year of production in number of aircraft, fleet at end 2014
Figure 65: Age of the Dassault Aviation's fleet by
geographical area in number of aircraft
0
10
20
30
40
50
60
70
80
90
100
1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005 2009 2013
Out of production In production
0.0
5.0
10.0
15.0
20.0
25.0
30.0
DassaultAviationaverage
Middle East -Africa
Asia Pacific LatinAmerica
Europe NorthAmerica
Source: Ascend, Credit Suisse research Source: Ascend, Credit Suisse research
An important element of the future maintenance revenues is, in our view, the retirement of
the US fleet of Falcon 20s delivered in the 1960s-70s, as the first aircraft are now 50 years
old. This should be offset by the start of heavy maintenance on the Falcon 7X, with the
first C-Check having been completed in October 2014.
The growth in cycles is held back by the out-of-production fleet
After the 2009 collapse (in line with the overall US market), the flight cycles for the Falcon
fleet operated in the US have been broadly flat since 2010 to 2013. They showed a slight
acceleration in 2014 (+2.6%), but are still trailing the overall market (+3.5%). Cycles for
Gulfstream large jets, for instance, were up 7.6% in 2014. As a result of a lower growth
than the market, the Dassault fleet accounted for 8.5% of the total flight cycles in the US in
2014 vs. 11.1% in 2000.
Figure 66: Not much growth for Dassault's fleet utilisation
in the US in number of flights
Figure 67: Dassault's flight cycles trailing the overall
business jet market in the US Growth in flight cycle in %
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
0
100,000
200,000
300,000
400,000
500,000
600,000
2000 2002 2004 2006 2008 2010 2012 2014
Dassault fleet Dassault fleet as % of total US flights
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
All business jets All Falcon
Falcon - in production Falcon - Out of production
Source: FAA data Source: FAA data
28 May 2015
Dassault Aviation (AVMD.PA) 40
We believe that this trend reflects the ageing of the Dassault fleet (>21 years old in the US
on average), which leads to a lower utilisation of the older part of the fleet and some
retirements (not surprising for Falcon 20s which can be 50 years old).
Figure 68: Growth in operations for the Falcon 2000 and
Falcon 7X in number of flights in the US
Figure 69: The out-of-production models still accounts for
34% of the Falcon fleet's flights Falcon flights in the US, 2014-2015YTD
0
50,000
100,000
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
2000 2002 2004 2006 2008 2010 2012 2014
Falcon 900 Falcon 2000 Falcon 7X Falcon 20 Falcon 10 Falcon 50
Falcon 90023%
Falcon 200037%
Falcon 7X6%
Falcon 5018%
Falcon 2011%
Falcon 105%
Source: FAA data Source: FAA data
This mitigating factor is likely to persist until the Falcon 20/10/50 fleet accounts for less
than 20% of the total flights. It currently weighs 37% of Dassault's fleet and 34% of its US
fleet flight.
Expanding the Falcon Services network
Most of the group's support out of the US and Europe currently relies on Authorised
Support Centres.
With the geographical diversification of its fleet, Dassault Aviation also provides a support
network. It added Deer Jet (the largest Asian business jet operator) as the line service
facility for the Falcon 7X in Beijing in April 2015 and launched a Falcon Chinese website in
May. It indicated that its spare parts inventory in Asia now exceeds USD30m.
28 May 2015
Dassault Aviation (AVMD.PA) 41
Figure 70: Dassault Falcon official support network
Europe North / South America Asia-Pacific Middle East - Africa
Dassault owned
Le Bourget (France) Little Rock (US)
Teterboro (US)
Reno (US)
Wilmington (US)
Sorocaba (Brazil)
Dassault owned - satellite service stations
Moscow (Russia) Van Nuys (US)
Luton (UK) Saint Louis (US)
Nice (France) West Palm Beach (US)
Roma (Italy)
Authorised Support Centres (ASC)
Jet Aviation (Switzerland) Aero Personal (Mexico) Air Works India Eng. (India) Arkia Israeli Airlines (Israel)
RUAG (Switzerland) Duncan Aviation - Battle Creek (US) Taj Air Metrojet Aviation (India) Jet Aviation Dubai (UAE)
TAG Aviation (Switzerland) Duncan Aviation - Lincoln (US) Hawker Pacific (Australia) SAEI (Saudi Arabia)
Cobham CAS (UK) Standard Aero - Augusta (US) Jet Aviation (Hong Kong) Bhakari (South Africa)
JETS Biggin Hill (UK) Standard Aero - Houston (US) Shanghai Hawker Pacific (China) Execujet Maintenance (South Africa)
TAG Farnborough (UK) Standard Aero - Los Angeles (US) Deer jet (China)
Aliserio (Italy) Standard Aero - Springfield (US) Hawker Pacific Asia (Singapore)
Servizi Aerei (Italy) Western Aircraft - Boise (US)
AMAC Aerospace (Turkey)
Aero-Dienst (Germany)
Air Alsie (Denmark)
Airfix Aviation (Finland)
Corjet (Spain)
JATEC (Austria)
Source: Company data
High level of fleet for sale
As a result of its slightly older average age, the number of used jets for sale is slightly
higher at Dassault Aviation than at peers, Gulfstream and Bombardier (excluding Learjet).
However, it is not significantly different from the market average.
Figure 71: Slightly more used jets for sale at Dassault Aviation than at peers Fleet available for sale as a % of total fleet in operation, April 2015
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
Fal
con
10/1
00
Fal
con
50
Fal
con
20/2
00
Fal
con
900
Fal
con
2000
Fal
con
7X
Das
saul
t ave
rage
Mar
ket a
vera
ge
Gul
fstr
eam
Bom
bard
ier
(exc
l. Le
arje
t)
Ces
sna
Lear
jet
Haw
ker
Source: Jetnet data
28 May 2015
Dassault Aviation (AVMD.PA) 42
In the 2000s, there was a gap between Dassault Aviation and the rest of the market, with a
lower level of used aircraft availability at Dassault. This gap closed between 2010 and
2014, and now there are more Falcons for sale than for the rest of the market on average,
with a spike occurring since the end of 2014.
Figure 72: Available fleet for sale higher at Dassault than others in % of the installed fleet
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
Jan-05 Oct-05 Jul-06 Apr-07 Jan-08 Oct-08 Jul-09 Apr-10 Jan-11 Oct-11 Jul-12 Apr-13 Jan-14 Oct-14
Dassault Aviation Market
Source: Jetnet
Looking at the asking price on the market for Falcon business jets and the number of days
they have spent on the market before being sold, we see some pressure building after the
recovery in the wake of the 2009 financial crisis. In particular, we note that the days spent
on the market remain at a level similar to that at the start of the crisis, while in the previous
cycles, this ratio went down significantly. This is influenced, in our opinion, by the ageing
of the fleet and, therefore, the aircraft for sale are less attractive. The average asking price
is also a function of the mix of aircraft available for sale.
Figure 73: Asking price in USDm, Falcons trades
Figure 74: Days available on the market before sale in days listed as available for sale, Falcons trades
0
2
4
6
8
10
12
14
16
18
Jan
-19
90
Jun
-19
91
No
v-1
99
2
Ap
r-1
99
4
Sep
-19
95
Feb
-19
97
Jul-
19
98
De
c-1
99
9
May
-20
01
Oct
-20
02
Mar
-20
04
Au
g-2
00
5
Jan
-20
07
Jun
-20
08
No
v-2
00
9
Ap
r-2
01
1
Sep
-20
12
Feb
-20
14
0
100
200
300
400
500
600
Jan
-19
90
Jun
-19
91
No
v-1
99
2
Ap
r-1
99
4
Sep
-19
95
Feb
-19
97
Jul-
19
98
De
c-1
99
9
May
-20
01
Oct
-20
02
Mar
-20
04
Au
g-2
00
5
Jan
-20
07
Jun
-20
08
No
v-2
00
9
Ap
r-2
01
1
Sep
-20
12
Feb
-20
14
Source: Jetnet data Source: Jetnet data
Given high brand loyalty amongst business jet customers (made even stronger by trade-
ins), the ageing fleet may support OE sales for Dassault Aviation in the coming years
when these aircraft are up for replacement.
28 May 2015
Dassault Aviation (AVMD.PA) 43
Trade-in of used aircraft: a limited number, but likely to increase
The current level of fleet available for sale implies that Dassault may have to make trade-
ins to facilitate clients out of their current aircraft. Dassault Aviation has a policy of limiting
such deals, owing to a fundamental lack of appetite for such transactions. It does not
disclose how many used aircraft it carries in its books, and simply indicates that it is not a
large number.
Used aircraft appear on the balance sheet as part of the other PP&Es. Looking at how
other PP&Es and their impairment charges have trended over the past 10 years would
suggest that Dassault traded in a number of used aircraft in 2008-2010 during the financial
crisis. Some may have also been bought in 2006-2007 on the entry in service of the
Falcon 7X (probably as operators switched models).
If we assume that (1) the gross value increase for the other PP&Es in 2008-2010
(+EUR100m) was from used aircraft (a rather extreme assumption), and (2) a used Falcon
fetches a value of EUR6m (USD8m or so), this would imply that Dassault bought around
15 aircraft over 2008-2010. The other PP&E disposal flows would also suggest that these
aircraft were sold in 2012-2014.
Looking ahead, we believe that the entry in service of the Falcon 8X and Falcon 5X in
2016 and 2017 will trigger an resurgence of trade-ins. Dassault operators are faced with a
heavy market in terms of used jets available, which prevents them from easily selling their
current jets to fund the purchase of a new one. As a result, we have included EUR150m
worth of trade-ins over 2016E-18E in our cash flow numbers (assumed to be sold back
with a one-year lag after the purchase). The group states that it has not modified its
cautious commercial policy regarding trade-ins.
Figure 75: Other PP&Es points towards used aircraft
purchases in 2008-2010 in EURm
Figure 76: Some trade-ins expected for 2016E-18E to help
make the transition to the Falcon 8X and 5X smooth in EURm, gross additions and disposals, annual impairments
0
50
100
150
200
250
300
350
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Other PP&E - gross value Other PP&E - net value
-60
-40
-20
0
20
40
60
80
100
120
2005 2007 2009 2011 2013 2015E 2017E 2019E
Additions Disposals Impairment
Source: Company data Source: Company data, Credit Suisse estimates
As at mid-May 2015, the Dassault Falcon official site advertises 24 pre-owned aircraft (not
all of which are owned by Dassault Aviation): 3 Falcon 7X, 4 Falcon 2000, 1 Falcon 50EX,
15 Falcon 900 and a Citation X (a total of 1.2% of Dassault's installed fleet). We see this
as evidence of the limited extent of the trade-ins at Dassault.
Non-OE defence activities likely to remain solid
We estimate that the French business, excluding Rafale OE, accounts for EUR200-300m
p.a. in revenues, and consists of operational and maintenance support, as well as some
28 May 2015
Dassault Aviation (AVMD.PA) 44
development work. These include UAVs (nEUROn programme, UCAV developments in a
joint French-UK programme).
International revenues (c.EUR200m) are from support services and upgrades until Rafale
OE deliveries start for Egypt later in 2015.
We do not expect material fluctuations in support activities, with Dassault's global combat
aircraft fleet broadly stable (for its most modern part).
In the short term, an increased pace in military operations of Dassault Aircraft operators
(France, UAE, Egypt, for instance) in Mali, Libya, Yemen or Iraq will generate additional
maintenance and support activity.
Main upgrade contracts include some 50 Mirage 2000s for India (revenues to be booked in
H1 2015) and the maritime patrol aircraft Atlantique 2 for France (estimated acceptance
with the first deliveries in 2018E). These will generate lumpiness in revenues.
A 1,000 military aircraft fleet
Dassault indicates that, as at end-2014, it had about 1,000 military aircraft in service
globally.
There are some 400 Dassault aircraft in France (Rafale, Mirage 2000, Mirage F1, Alphajet
trainers, Super Etendard).
The Super Etendard carrier aircraft are to be retired in 2016 and replaced with 10 Rafale
aircraft currently being upgraded from the F1 to the F3 standard.
Figure 77: c.400 military aircraft from Dassault Aviation in operations in France in number of aircraft
0
25
50
75
100
125
150
175
200
Rafale Mirage 2000 Alphajet Super Etendard Atlantique 2 Falcon
Armee de l'Air Marine
Source: Ministere de la Défense
This implies some 600 aircraft are abroad, ranging from Mirage 2000s to Alphajet trainers
and older Mirage IIIs / Mirage 5s.
This is less than the 700 from the Flightglobal Worldwide Air Force Directory of late 2014,
not surprisingly given the classified nature of this information in some countries. The data
from Flightglobal in the following two figures give a sense of how the fleet is spread
between aircraft type and countries, but it is worth keeping in mind that the data are not
fully accurate, in particular concerning the older aircraft such as the Mirage III / Mirage 5.
We would expect some of these older aircraft to be retired (if they have not already been
retired) at some point, for instance, the Mirage III / Mirage 5 in Pakistan are likely to be
replaced by 2025. But the impact would be gradual and limited. Also, newer platforms are
28 May 2015
Dassault Aviation (AVMD.PA) 45
ageing and, due to their higher sophistication, they generate increased maintenance and
support, especially when used with at an accelerated pace in military operations.
Figure 78: Dassault Aviation non-French fleet by aircraft
type in number of aircraft – based on c.700 units
Figure 79: Dassault Aviation non-French fleet by country in number of aircraft – based on c.700 units
Mirage 200037%
Mirage 526%
Alphajet19%
Mirage III12%
Mirage F14%
Super Etendard2%
Pakistan23%
Egypt21%
Taiwan8%
UAE8%
India8%
Greece6%
Morocco6%
Belgium4%
Argentina3%
Qatar3%
Others10%
Source: Flightglobal Air Force Directory 2015 Source: Flightglobal Air Force Directory 2015
28 May 2015
Dassault Aviation (AVMD.PA) 46
Earnings drivers: volumes, mix, FX, R&D, Thales A strong jump in revenues starting in 2017 is expected to lift Dassault's earnings and
profitability. A favourable FX trend and a reduction in R&D spending should also contribute
significantly to the expected increase in operating profits. Net income should be boosted
further by the rise in Thales's contribution.
We expect the net cash position to reach EUR4.7bn at the end of the decade. Barring a
change in policy, it is unlikely to be distributed to shareholders. FCF will benefit from the
earnings growth and the decrease in capex. In 2015, we estimate that it will receive a
EUR1.4bn boost from the Rafale export order down payments.
Group revenues to jump by about 80% by the end of
the decade
We are expecting total revenues for Dassault Aviation to stabilise at around EUR6.5-7bn
by the end of the decade, up from an average of about EUR3.8-4bn between 2007 and
2014 (+80%).
This move will likely be driven by the following elements:
■ A rebound in Falcon deliveries starting in 2017, driven by the entry in service of the
new Falcon 8X (mid-2016) and Falcon 5X (2017);
■ The corresponding increase in average selling price, with the newer models being
more expensive than the previous ones;
■ A weakening of the euro against the dollar, boosting Falcon revenues (nearly all sold
in USD);
■ The rise in deliveries of the Rafale for export customers, with an impact starting in
2018 (assuming that the Indian contract is signed), and Egypt and Qatar offsetting the
decrease of French deliveries.
Figure 80: Dassault Aviation's revenues by activity – a significant jump starting in 2017 in EURm
-30%
-10%
10%
30%
50%
70%
90%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016E 2018E 2020E
Falcon Defence France Defence export Growth
Source: Company data, Credit Suisse estimates
The main assumptions included in our numbers are; (1) India will finalise its 36-Rafale
order in the coming months, (2) the high-end business jet market is soft but does not drop,
28 May 2015
Dassault Aviation (AVMD.PA) 47
(3) the new Falcon 8X and 5X enter service seamlessly and (4) the EUR/USD spot rate
remains at around 1.15. Our revenue forecasts also reflect the lumpiness of the
accounting of development contracts by Dassault.
Falcon revenues to nearly double by 2020
Measured in US dollars, we expect the OE Falcon revenues of Dassault Aviation to remain
broadly flat in 2015-16 on stable deliveries. They should start rising in 2017, when the new
Falcon 8X and 5X models will have entered in service.
This increase would result from the combination of an increase in deliveries (thanks to the
entry in service of new models and despite a soft market at the moment) and the
continued rise in average selling price.
Given that almost all Falcon sales are USD-denominated, the part of the revenue that is
naturally hedged should also reflect the euro weakening, further boosting sales (with no
earnings impact).
Organic revenues to start rising in 2017
Turnover should grow 10% in 2015 thanks to FX (conversion of naturally hedged USD
revenues at spot rate – 1.15 in our model) on flat deliveries. 2016 should be broadly stable,
assuming no change in FX and no shift in the mix of deliveries.
We then expect a strong growth phase to start in 2017, as the Falcon 8X and 5X ramp up.
The industrial risk on the Falcon 8X (a partial derivative of the 7X) does not appear
significant, in our view. We believe that the Falcon 5X, a clean sheet design, carries a
much higher risk, especially in terms of engine performance (that needs to be
demonstrated in operations). The Silvercrest, which powers it, is Safran's first venture in
the field of business jet engines. The flight tests of the aircraft are to start in mid-2015, for
an entry in service in 2017. On 19 May, Safran announced that the certification of the
engine would be delayed by six months, with a target for mid-2016 rather than late 2015.
There has been no adjustment of the EIS date for the aircraft for the moment, as Dassault
reviews the consequences. Our numbers provide for a H2 2017E EIS.
As the mix of deliveries evolves towards more expensive models (see below), we expect
the turnover to double between 2014 and 2020E to reach EUR5bn. This is based on a
spot rate of 1.15 for the EUR/USD and 85-90 deliveries in 2020E (+30-35% vs. 2014).
Figure 81: Falcon – revenues, orders and backlog in EURm
Figure 82: Falcon – revenues, orders and backlog in % of total revenues, orders and backlog for the group
-5,000
-2,500
0
2,500
5,000
7,500
10,000
12,500
15,000
1996 1999 2002 2005 2008 2011 2014 2017E 2020E
Revenues Order intake Backlog
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1996 1999 2002 2005 2008 2011 2014 2017E 2020E
Revenues Order intake Backlog
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
28 May 2015
Dassault Aviation (AVMD.PA) 48
Average selling price to continue increasing for Falcons
Dassault Aviation has steadily increased its average selling price since the early 2000s
thanks to the introduction of new more expensive platforms. We believe this trend is set to
continue, as the share of the Falcon 2000 in deliveries diminishes and those of the Falcon
5X and Falcon 8X rise.
Figure 83: A steady increase in average selling price in USDm (billings, revenue per aircraft), number of aircraft delivered
0
10
20
30
40
50
60
70
80
90
100
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Billings Deliveries - rhs Revenue per aircraft - rhs
Source: Company data, Credit Suisse estimates
List prices for high-end business jets can top USD70m for the most expensive while, at the
lower end of the market (personal jets), they can be as low as USD2m. Dassault Aviation's
average selling price (calculated on deliveries as per GAMA billings data) is currently at
USD41m (vs. an average USD31m for the market overall). A Falcon 8X sells for USD57m.
This compares with the current price paid for an A320 of USD45m. Contrary to commercial
airliners, business jet prices are not heavily discounted (more than 50% off list price for an
airliner).
For instance, the Falcon 7X was 35-40% more expensive than the Falcon 900. The Falcon
5X price is 15% higher than the current Falcon 900LX. The price of the Falcon 8X is 8-
10% above the Falcon 7X and nearly twice that of the Falcon 2000.
Figure 84: High-end business jet list prices
In USDm
0
10
20
30
40
50
60
70
80
Glo
bal 7
000
Glo
bal 8
000
G65
0ER
G65
0
Glo
bal 6
000
G55
0
Fal
con
8X
G60
0
Fal
con
7X
Glo
bal 5
000
Fal
con
5X
Fal
con
900L
X
G45
0
Fal
con
2000
LXS
Cha
lleng
er 6
50
Fal
con
2000
S
Cha
lleng
er 3
50
G28
0
Bombardier Gulfstream Dassault Aviation
Source: B&CA May 2015
28 May 2015
Dassault Aviation (AVMD.PA) 49
The delivery mix shifted significantly in 2014, as illustrated in Figure 85, with more Falcon
2000 deliveries (a consequence of a strong US market, for which the Falcon 2000 is well
adapted). Our assumption is that this remains unchanged in 2015E and reverses in 2016
back to previous delivery mix levels, with less Falcon 2000s. If the mix were to reverse in
2015, it would increase our 2015 revenues estimates by some EUR50m and operating
profits by EUR5m.
Figure 85: A changing mix for Dassault's deliveries in USDm per aircraft, % of total deliveries
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
0.0
10.0
20.0
30.0
40.0
50.0
60.0
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Price per aircraft delivered
Market average price delivered
Share of Falcon 2000 / Falcon 50 in deliveries - rhs
Source: GAMA, Credit Suisse calculations and estimates
We believe that this mix evolution has a positive impact on profits, through better R&D and
fixed costs absorption. Also, even assuming a flat operating margin and stable overall
deliveries, this should lead to an increase in the absolute profit amount booked by the
company.
Continuing the rebound in services
We have modelled a 5% annual growth for services activities going forward, slightly higher
than the expected growth in US flight hours (+4% p.a., according to GAMA/FAA), to reflect
the increasing diversity of the geographical base of Dassault's fleet, despite the slower
pace it has seen in the US. It also reflects the increase that we expect for trade-ins of used
Falcons as the new models enter service.
28 May 2015
Dassault Aviation (AVMD.PA) 50
Figure 86: Since 2013, a 1.3x multiplier between GDP growth and flight hours in the US
-5%
-3%
-1%
1%
3%
5%
7%
-40%
-30%
-20%
-10%
0%
10%
20%
30%M
ay-0
7
Se
p-0
7
Jan
-08
Ma
y-0
8
Se
p-0
8
Jan
-09
Ma
y-0
9
Se
p-0
9
Jan
-10
Ma
y-1
0
Sep-1
0
Jan
-11
Ma
y-1
1
Se
p-1
1
Jan
-12
Ma
y-1
2
Se
p-1
2
Jan
-13
Ma
y-1
3
Se
p-1
3
Jan
-14
Ma
y-1
4
Se
p-1
4
Jan
-15
lhs - Growth in Op Cycles y/y% rhs - US real GDP growth, y/y%
Source: Jetnet data, Thomson Reuters
As illustrated in Figure 87, we estimate that services revenues dropped significantly in
2009-2010, which we attribute to the financial crisis and the resulting drop in flight hours,
maintenance activities and used aircraft sales. The deterioration of the USD rate also had
an impact. We derive our estimates from the difference between total Falcon sales and OE
revenues, which are, in turn, derived from the GAMA OE billing data.
Figure 87: Estimated Falcon non-OE revenues in EURm
0%
5%
10%
15%
20%
25%
30%
35%
40%
0
100
200
300
400
500
600
700
800
900
1000
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Implicit services revenues (in EURm) Share of total Falcon revenues
Source: Credit Suisse estimates
Export strength should offset French weakness in
defence
Overall, we see defence revenues (France + export) tripling between 2014 (EUR995m)
and 2018E (EUR3.3bn), driven by (1) an export boom fuelled by the Rafale orders and (2)
booking the F3-R standard for the Rafale and the ATL2 upgrade in 2018 in the P&L.
Export revenues to increase significantly
We expect the three international orders for the Rafale to take Defence Export revenues to
c.EUR2.0bn in 2018E and 2019E, from the current c.EUR200m.
28 May 2015
Dassault Aviation (AVMD.PA) 51
In 2015, we expect an 1H spike in revenues, as the group should book the revenues and
profits for the Mirage 2000 upgrade contract with India (signed in 2011), with the first
upgraded aircraft having been delivered to India earlier this year.
The French industry (including Dassault Aviation) financed 25% of the development of the
Rafale in the 1990s, in return for an agreement with the French State that this would be
recouped on the exports of the aircraft. We estimate that self-financed R&D amounted to
EUR1bn over 10 years or so, with a share of 60% for Dassault Aviation. There has been
no indication on how this will play out now that the Rafale has been sold to Egypt and
Qatar and could be sold to India and possibly to other countries. However, it is possible
that it supports the profitability of the Rafale export sales for Dassault Aviation, even if
these sales have been made under government-to-government contracts.
Figure 88: Export – revenues, orders and backlog in EURm, including Egypt, Qatar and India in 2015E orders
Figure 89: Export – revenues, orders and backlog in % of total revenues, orders and backlog for the group
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1996 1999 2002 2005 2008 2011 2014 2017E 2020E
Revenues Order intake Backlog
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1996 1999 2002 2005 2008 2011 2014 2017E 2020E
Revenues Order intake Backlog
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
The group is reviewing how it should account for the Rafale export contracts as it is acting
as prime contractor and sales lead at the client's request. This might lead Dassault
Aviation to book 100% of the revenues on these contracts, including Thales' and Safran's
40% share of the aircraft, something it traditionally does not do. The decision to implement
this will be taken before the H1 results on 24 July. It would boost order inflow and future
sales, but would dilute the profit margin. This will have no impact on the economic value of
the contracts for Dassault, as it will book no additional profit.
French defence revenues to drop
Given the expected drop in French Rafale deliveries in France, defence revenues for
France should decrease from c.EUR800m to below EUR300m in 2017E (only support
activities). We estimate that the Rafale generates annual OE revenues of some EUR500m
for 11 deliveries to France and that this will drop to nil in 2018E-2020E.
Some sales volatility occurs because of the way Dassault accounts for the development
contracts it receives, with revenue and profit recognition at the time of customer
acceptance (and not under a percentage of completion method). For instance, the
revenues and profits on the EUR650m contract for the F3-R standard for the Rafale will
only be accounted for in the P&L upon customer acceptance in 2018. The same will
happen with the Atlantique 2 maritime patrol aircraft upgrade (ATL2), with first delivery
expected in 2018. This will generate a temporary spike in revenues in France that year. In
terms of cash, payments will have been received according to the contractual milestones.
28 May 2015
Dassault Aviation (AVMD.PA) 52
Figure 90: French defence revenues fall as a result of cuts
in Rafale deliveries in EURm
Figure 91: Defence France to account for only c.10% of
group's revenues vs. 25% in the 2000s in % of group's total
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1996 1999 2002 2005 2008 2011 2014 2017E 2020E
Revenues Order intake Backlog
0%
10%
20%
30%
40%
50%
60%
70%
1996 1999 2002 2005 2008 2011 2014 2017E 2020E
Revenues Order intake Backlog
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Order intake is also lumpy, driven by multi-year orders for the Rafale (2004, 2009) or
upgrade orders for the Rafale and other platforms (2004, 2009, 2013).
We have assumed that Rafale deliveries for France resume after 2020. This implies that
there will be 28 units left from the current order in addition to the 225-aircraft fleet
operational plans of the French air force that calls for a new order of 45 more aircraft;
however, this will not be decided before the next LPM (2020-2025) with discussions
starting in 2018-19.
FX: EUR8m sensitivity/1 cent and rising
We calculate a current net exposure of c.USD1.3bn for Dassault Aviation, resulting in an
EUR8m operating income sensitivity for each 1 cent of the EUR/USD rate (i.e., a 1.5-2.0%
sensitivity). At the end of the decade, volume increases and the euro weakness should
drive net exposure to EUR15m. This number does not include the indirect sensitivity
derived from Dassault Aviation's 25% stake in Thales.
A net exposure of USD1.3bn
Dassault Aviation's EUR/USD net exposure comes to USD1.3bn a year, according to our
calculation. We expect it to rise to USD2bn by the end of the decade, due increased
Falcon revenues.
28 May 2015
Dassault Aviation (AVMD.PA) 53
Figure 92: A rising net FX exposure in USDm and number of aircraft delivered
0
10
20
30
40
50
60
70
80
90
100
0
1,000
2,000
3,000
4,000
5,000
6,000
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Gross exposure Net exposure Falcon deliveries
Source: Company data, Credit Suisse estimates
We estimate the group's USD revenues at USD3.4bn a year, with nearly all of the Falcon
sales made in dollars (French Falcon sales amounted to EUR70-140m p.a. over the past
10 years and were likely to be mostly in euros). All defence revenues are booked in euros.
More than 50% of the Falcon costs are in USD. The group buys its engines, avionics,
aerostructures, fasteners in dollars. It also has a 1,800-people completion centre in
Arkansas (Little Rock) and maintenance facilities across the US, bringing the total US
workforce to 2,600 employees (22% of the group's workforce). It ships its aircraft to the US,
with only basic avionics, for completion.
Hedges: improving from 2017 onwards
The resulting net exposure is hedged by Dassault Aviation. It traditionally used forward
sales, but recently switched to structured derivatives, now using accumulators. We have
assumed that the group had a hedgebook of about 2.5 years.
We expect the next two years to be at an achieved rate similar to that of 2014 (1.25),
before the group can benefit from the lower euro. Dassault provides no guidance on its
future FX rates beyond saying that 2015 will be similar to 2014. We have assumed that
hedge rates are 1.24 in 2015E and 2016E before trending down to 1.19 (assuming a 4-
cent spread with the 1.15 spot rate that we have used in our model, corresponding to the
two-year current spread on forwards). We note that there is about a two-year lag between
moves in the spot rate and the hedge rate.
28 May 2015
Dassault Aviation (AVMD.PA) 54
Figure 93: Hedge and spot rates EUR/USD rate
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Hedge rate Spot rate
Source: Company data, Credit Suisse estimates
A EUR8m sensitivity of operating income to a 1 cent change in EUR/USD rate
As a result, we calculate that the operating income sensitivity comes to EUR8m for each 1
cent change in the EUR/USD rate, i.e., between 1.5% and 2% of the operating income.
Given the expected rise in net exposure by the end of the decade and the euro weakness,
sensitivity looks set to increase to EUR15m in 2020E (based on a net exposure of
USD2bn).
Figure 94: A positive impact from FX starting in 2017E in EURm, EUR/USD hedge rate
1.00
1.05
1.10
1.15
1.20
1.25
1.30
1.35
-60
-40
-20
0
20
40
60
2002 2004 2006 2008 2010 2012 2014 2016E 2018E 2020E
EBIT impact Hedge rate
Source: Company data, Credit Suisse estimates
Indirect sensitivity to Thales' sensitivity
Dassault Aviation's earnings are also indirectly sensitive to Thales' FX sensitivity, via its
25% stake in this company.
We currently estimate Thales' EUR/USD sensitivity at an EBIT level to be at EUR7m for
each 1 cent change (of which EUR1.5m is from translation exposure) on an unhedged
basis (i.e., in 2017E and beyond). We see it rising to EUR12m by the end of the decade as
28 May 2015
Dassault Aviation (AVMD.PA) 55
a result of the increase in Aerospace sales. Taking a 30% tax rate, the net income
sensitivity comes to EUR5m currently and could rise to EUR8.5m.
At the net income level for Dassault Aviation, this adds EUR1.2m of sensitivity
(unhedged), which would increase to EUR2.1m for each 1 cent change at the end of the
decade.
R&D tailwind, even if a new programme is launched
Most of the R&D is driven by the Falcon business, with limited self-financed R&D in
defence activities (such as the testing of some specific Rafale configurations, for instance).
Virtually all the R&D is expensed through the P&L.
R&D should significantly decrease in both absolute terms and as a percentage of sales,
even if we expect Dassault Aviation to launch a new programme after the development of
the Falcon 8X and 5X.
R&D spending should decrease
We expect R&D to decrease in 2016, after the entry in service of the Falcon 8X, and then
further decrease in 2017, with the entry in service of the Falcon 5X. We expect a further
reduction in 2018, but to a smaller extent. Indeed, our numbers assume a new programme
launch in 2017, once the R&D work recedes on the Falcon 5X (see below). Dassault
Aviation has not communicated the timing of the launch (and is unlikely to, for competition
reasons). We note that it is possible that the work could have already started.
With the revenues increase and despite our expectation of a new programme, this should
translate into a sharp decrease in R&D spending as a % of sales (with a euro weakness
tailwind), from the 13.3% peak in 2014 (the group currently has two programmes under
development) to around 6-7% in 2018E-20E (on EUR6.5-7.0bn revenues). When the
Falcon 7X was under development (from 2001 to 2005), Dassault Aviation spent an
average of about 7.5% of R&D on revenues of EUR3.5bn.
Figure 95: R&D to be a major operating margin tailwind after 2014 peak in EURm and % of revenues
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
0
100
200
300
400
500
600
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
R&D costs - P&L % of revenues
Source: Company data, Credit Suisse estimates – no R&D data available before 2004
Possible new product launches
We see room for new projects in the group's R&D spending starting in 2017-18, once the
Falcon 5X is on the market (first flight scheduled for mid-2015 and EIS in 2017).
28 May 2015
Dassault Aviation (AVMD.PA) 56
In our opinion, Dassault Aviation has two possible options in terms of new programmes: a
replacement for the Falcon 2000 and a new clean-sheet design in the very long range
field.
In our opinion, the first option would be a replacement of the Falcon 2000. This would
make sense as the aircraft was launched in 1989 and is now more than 25 years old.
Upgrades to keep the product attractive have been accelerating, as can be seen on the
programme mapping below. In our view, it would not be convenient to announce the new
programme too soon, as that could lead to a reduction in demand for the current Falcon
2000. This might explain the discrepancy between the R&D spending and the announced
programmes. Figure 53 illustrates that no new programme is in development in this
segment, with some recent aircraft having just started (G280 for instance).
Figure 96: Falcon programmes history
Year 1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
2018E
2019E
2020E
Falcon 20 = Q 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 q 1 1 1 1 1 1 1 1
Falcon 200
Falcon 10 = Q 1 1 1 1 1 1 1 1 q 1 1 1 1 1 1 1 1 1 1
Falcon 100
Falcon 50 = Q 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 q 1 1 1 1 1 1 1 1 1 1 1 1
Falcon 50EX
Falcon 900 = Q 1 1 1 1 1 q q q q 1 1 1 1 1
900B 900EX 900C 900LX
2000EX Easy 2000LX 2000LXS
Falcon 2000 = Q 1 1 1 1 1 q 1 1 1 p 1 1 1 q 1 pq 1 p 1 1 1 1 1 1 1
2000EX 2000DX 2000S
Falcon 7X = Q 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1
Falcon 8X = Q 1 1 1 1 1
Falcon 5X = Q 1 1 1 1
= Launch Q First flight In production pq New version Source: Company data, Credit Suisse estimates
Looking at Dassault Aviation's portfolio and that of its main high-end competitors as
illustrated in Figure 53, another option is to close an existing product gap at the very high
end of the market, for an aircraft with a range of >7,500nm and a price tag of c.USD70m.
Dassault could possibly launch a "Falcon 10X". However, given that Bombardier and
Gulfstream are already dominating this segment with the Global 7000/8000 and the
G650ER, this appears to be an unlikely option, in our view, given much of the potential
market is probably already filled. Our US team reports that Bombardier is sold out on the
in-development Global 7000/8000 until 2020, with the entry in service of the Global 7000
in 2017. General Dynamics indicated that Gulfstream would have no slot available for the
G650 before the end of 2017.
Past development costs point towards a potential cost of c.EUR500m for a new
programme, if the low end of the market is targeted and part of the Falcon 5X work is
reused. This would likely generate a reduction of the R&D spending by EUR150m p.a. on
average:
■ The budget for the Falcon 2000 was EUR220m based on 1990 conditions, i.e., close
to EUR300m in current terms. It reused the same wing as the Falcon 50. The first
flight was four years after launch in 1989.
■ The Falcon 7X had a development budget of EUR600m in 2003 and the budget may
have increased a little compared to initial plans (maybe to EUR650-700m in 2015
euros). Development was spread over 4.5 years, and included developing a new wing.
The Falcon 7X represented an annual spend of EUR130-140m to create an all new
design.
28 May 2015
Dassault Aviation (AVMD.PA) 57
■ Dassault Aviation stated that the budget for the Falcon 8X (partly derived from the
Falcon 7X) was EUR500m.
■ It has indicated that the budget for the Falcon 5X's all-new design (with a new
fuselage width and a new wing) was EUR1bn.
Figure 97: Development budgets for the Falcon family in EURm
0
200
400
600
800
1,000
1,200
Falcon 2000 Falcon 7X Falcon 8X Falcon 5X New Falcon
Source: Company data, Credit Suisse research
No R&D capitalisation
Dassault Aviation capitalises almost no R&D cost (EUR4m in 2012, EUR60k in 2013 and
nothing in 2014) nor any other programme-related intangibles, as illustrated in Figure 98.
At the end of 2014, the capitalised R&D net value on balance sheet was EUR8m and we
expect these remaining EUR8m to be fully amortised in 2015E.
Figure 98: No more capitalised R&D on balance sheet in EURm
0
10
20
30
40
50
60
70
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
Net capitalised R&D asset Addition Amortisation
Source: Company data, Credit Suisse estimates
28 May 2015
Dassault Aviation (AVMD.PA) 58
A rising contribution from the 25% stake in Thales
Dassault Aviation owns a 25% stake in Thales, which contributed EUR129m to the group's
net income in 2014. We see this rising to EUR207m in 2018E, thanks to earnings
improvement at Thales.
A brief history of Dassault's stake in Thales
In 1997-98, Alcatel and the Dassault group (GIMD) sold a number of assets to Thales
(Thomson CSF at the time) in return for stakes in the group. In particular, GIMD received
6% in return for its stake in Dassault Electronique (a company created by Serge Dassault).
A further capital increase occurred in 2006-07, when Alcatel Lucent sold its satellite
operations to Thales in exchange for 12.1% of the group's equity.
In 2009, the French government allowed Alcatel Lucent to sell its 20% stake in Thales to
Dassault Aviation. GIMD also sold its 5.1% stake to Dassault Aviation at the same time,
bringing Dassault Aviation's stake in Thales to the current 25%.
Shareholder agreement with the French government
In 2009, when it bought Alcatel Lucent's stake, Dassault Aviation agreed to a number of
conditions that allowed the French market authorities to rule that it did not have to launch a
mandatory bid on Thales.
In particular, the French government maintains a dominant position in relation to Dassault
Aviation in Thales. It has more board members than Dassault Aviation and it controls more
voting rights.
This agreement is up for renewal in December 2016. None of the parties involved has
signalled an intent to amend it. However, the recent issues surrounding the nomination of
Henri Proglio as chairman of Thales which led to him withdrawing one day before the
Annual General Meeting (AGM), could potentially trigger a review of the agreement, in our
opinion.
Thales contribution to Dassault's earnings
Dassault Aviation consolidates its stake in Thales as an equity-accounted associate. We
expect Thales' results to increase over the next few years, thanks to a return to organic
growth, a favourable FX impact, the continuation of cost-cutting efforts and a rebound in
transport profitability and the DCNS recovery. See our reports below for more details:
■ Q1 review: sales and order intake – 6 May 2015
■ Solid (FY review) – 26 February 2015
■ Improved earnings quality not yet rewarded (in sector initiation note, Civil OE
headwinds) – 18 November 2015
Thales' contribution to Dassault's earnings also includes the PPA amortisation, unlike most
peers. We expect PPA amortisation to decrease over time, as detailed below.
Figure 99: Thales' contribution to Dassault Aviation in EURm
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Thales - 100% -19 -108 512 586 573 714 794 894 966 1,030 1,156 1,205
Thales - Dassault stake (%) -5 -28 135 154 148 182 200 226 244 260 292 304
Thales - Dassault share -5 -28 135 154 148 182 200 226 244 260 292 304
PPA -59 -103 -84 -68 -57 -45 -43 -43 -43 -43 -24 -4
Other impacts -2 4 -10 -4 -13 -8 -10 -10 -10 -10 -10 -10
Impact on Dassault reported
net income
-66 -128 41 83 78 129 147 172 191 207 258 290
Dividend received 54 26 39 41 47 63 59 61 65 69 74 82
Source: Company data, Credit Suisse estimates
28 May 2015
Dassault Aviation (AVMD.PA) 59
However, contrary to its sector peers, Dassault Aviation does not include its associates in
its operational earnings. Doing so and adjusting for PPA would have brought the EBIT
margin to 14.3% in 2014 (vs. 9.6% reported).
This has no impact on valuation, as we value Thales at list price. We also provide a
sensitivity table for Thales share price evolutions (see Figure 20).
Evolution of the relationship between Dassault Aviation and Thales
Investors often wonder how (and if) the relationship between Dassault Aviation and Thales
will evolve. In particular, the question is often asked whether there will be a merger
between the two companies. The CEO of Dassault Aviation, Eric Trappier, commented to
Le Figaro (6 February 2015) that there was no existing plan for a merger.
The existing shareholder agreement between Dassault Aviation and the French State
prevents Dassault Aviation from increasing its stake to a level higher than that of the
French State. Doing so would either trigger a review by the French market authorities to
decide on whether a mandatory takeover bid were necessary (a reflection of the change of
control in the shareholder agreement) or break the pact. We also note that the agreement
is up for renewal in December 2016. We do not expect any change on this occasion, given
the political situation in France.
Lastly, Dassault Aviation appears to be an active shareholder in Thales, with its top
management actively participating in Thales' board and on its various committees
(including the audit committee). This allows Dassault Aviation to share its best practices,
for instance in terms of risk control. During its FY14 results presentation, the CEO of
Dassault Aviation also indicated that there was no plan to increase Thales' stake in French
shipbuilder DCNS, with all parties focused on profitability recovery.
Figure 100: Dassault scrupulously remaining below the
French government in number of Thales shares… in number of shares
Figure 101: …and in voting rights in number of voting rights
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2006 2007 2008 2009 2010 2011 2012 2013 2014
French State Dassault Employees
Free float Alcatel-Lucent Treasury shares
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
2006 2007 2008 2009 2010 2011 2012 2013 2014
French State Dassault Employees
Free float Alcatel-Lucent
Source: Thales Source: Thales
Business-wise, Thales and Dassault only have a limited level of joint activities, mostly
centred on the Rafale fighter aircraft (for which Thales provides the radar, most of the
avionics and some other equipment, representing about 20-25% of the value of the
aircraft). Also, we note their cultures are very different, which could represent a key
challenge.
28 May 2015
Dassault Aviation (AVMD.PA) 60
Earnings to increase sharply on volumes and margin
expansion
We expect earnings to benefit from the ramp-up of deliveries and the increase in the
average selling price, the switch to export contracts on the Rafale, FX improvement
(assuming that the group can improve its hedges after 2017E), R&D reduction and
progress at Thales.
Operating income to increase sharply in 2017 and beyond
We see operating profits rising to EUR800-900m in 2018E-20E, thanks to the mix impact
in the Falcon business and the Rafale deliveries to India, as well as the reduction in R&D
and the FX gains. This would take the operating margin back to its peaks of the past 15
years.
Were France and India to fail to agree on the 36 Rafale, we would have to remove this
assumption of EUR100m in 2017E and EUR900m p.a. in 2018E-20E from our model
revenues, with an estimated 10% operating margin contribution.
Figure 102: A strong growth in profitability Reported operating margin, in EURm and % of sales
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
0
100
200
300
400
500
600
700
800
900
1,000
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Operating income
Operating margin in % - rhs
Operating magin restated for capitalised R&D in % - rhs
Source: Company data, Credit Suisse estimates
2015 earnings should be slightly up, and we expect no volume/mix impact beyond the
booking of profits on the development contract for the Indian Mirage 2000 upgrade.
Earnings should start growing in 2016, as Falcon revenues grow and the defence
business ramps up, coupled with the start of the R&D tailwind. We expect no FX boost.
2017 should be the start of significant operating earnings growth, thanks to the
combination of the volume increase, the improvement in USD hedging, the decrease in
R&D and the start of increased Rafale delivery.
We expect 2018 to see earnings rise sharply thanks to increased Rafale deliveries (owing
to the start of the Indian contract) and the booking of the F3-R Rafale standard
development and ATL2 upgrade contracts following customer acceptance.
28 May 2015
Dassault Aviation (AVMD.PA) 61
Figure 103: Operating income bridge 2014-2018E in EURm
35311 -2 8 370
3340 0 442
65
6026 594
83 60 0 33 769
0
100
200
300
400
500
600
700
800
900
2014
Vol
ume
/ mix
R&
D FX
2015
E
Vol
ume
/ mix
R&
D FX
2016
E
Vol
ume
/ mix
R&
D FX
2017
E
Vol
ume
/ mix
F3R
con
trac
t
R&
D FX
2018
E
Source: Company data, Credit Suisse estimates
No operating income breakdown by activity
Dassault Aviation does not disclose the profitability of its two activities, as it would be
detrimental to its competitive position. However, due to its services mix, defence is likely to
be more profitable than business jets, in our opinion.
Moreover, there is significant joint use of the group's main industrial assets, making the
split even more difficult to make, even internally. For instance, the design office is busy
with both the aerodynamics of Falcon business jets and military UCAVs. The flight controls
(developed in-house, a key differentiator vs. its competitors) for the military aircraft of the
group are the technological foundation for those used in the Falcons. The group has
specialised most of its plants by industrial process, not by product line, as illustrated in the
Figure 104. Overall, about 75% of the group's employees work in a dual Falcon/defence
plant. The main entity with a single activity area is the Falcon's customisation centre in
Little Rock in the US.
Figure 104: Dassault Aviation industrial set-up (excluding smaller support entities)
Name Employees Falcon Defence
France
Seclin Machining and forming 280
Argenteuil Manufacturing and fitting out fuselages 1,000
Saint-Cloud Head office, design office 2,850
Argonay QC, support departments, Engineering 500
Merignac final assembly and flight preparation 1,300
Martignas manufacturing of wings 450
Istres flight testing 600
Biarritz composite components and adhesive bonded components;
sub-assembly work; hydraulic and electrical layout
1,050
Poitiers Sub-assemblies, canopies, pyrotechnic equipment 130
SOGITEC Simulation, training and documentation systems 450
Dassault Falcon Services – Le Bourget Rental of business jets, FBO 500
US
Dassault Falcon Jet - Little Rock Falcon customisation: interior fittings and livery 1,800
Dassault Falcon Jet – Teterboro Dassault Falcon Jet head office 400
Source: Company data
28 May 2015
Dassault Aviation (AVMD.PA) 62
High degree of flexibility
Despite facing large swings in revenues over the past 20 years, Dassault Aviation's
employee count remained remarkably stable (11,654 employees on average in 2014 vs.
12,068 in 1996). This highlights how flexible the group is as a production outfit, with a very
high degree of subcontracting.
Figure 105: Little fluctuations in employee numbers despite large swings in revenues in number of employee, annual average, change in revenues and in number of employees in %
-30%
-20%
-10%
0%
10%
20%
30%
40%
50%
60%
70%
0
2,500
5,000
7,500
10,000
12,500
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016E 2018E 2020E
Number of employees (average) Revenue change in % - rhs
Number of employee change in % - rhs
Source: Company data, Credit Suisse estimates
Associates are not included in EBIT
Dassault Aviation, contrary to its European peers, does not include the net income
contribution from its associates in its operating income. We find it to be the most
conservative and appropriate approach.
However, for comparison sake with the other European peers, we have calculated what
the operating margin should look like with the inclusion of 25% of Thales's net income.
The group would have a margin of 13.9% in 2015E and 16.5% in 2017E vs. 9.1% and
11.9% reported, respectively (i.e., it would boost its operating margin by 400-500bps). Our
restatement also includes the very marginal impact of the capitalised R&D.
28 May 2015
Dassault Aviation (AVMD.PA) 63
Figure 106: Operating income report vs. adjusted with Thales contribution in % of revenues
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
20.0%
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Operating margin - reported Adjusted EBIT margin
Source: Company data, Credit Suisse estimates
Net income and adjustments
The reported net income includes the Thales PPA impact and the impact of marked-to-
market derivatives on its financial income. Dassault Aviation recently decided to also
publish an adjusted number excluding the PPAs and these marked-to-market impacts.
The largest contributor to growth in net profit is expected to be the volume/mix impact,
driven by the ramp-up of the new Falcons and the Rafale for the export market. The next
largest contributors are the R&D decrease, the increase in Thales' contribution and the
positive impact from FX. We have included an estimated EUR60m profit booked on the
release of the F3-R standard for the Rafale following client acceptance in 2018E.
Figure 107: Net income bridge 2014-2018E in EURm, adjusted data (Dassault definition)
398
19260
98
66
111
-135
-35 755
0
200
400
600
800
1,000
1,200
1,400
2014 netincome
Volume / mixexcl. F3R
F3Rcontract
R&D FX Thales Tax Otherelements
2018E netincome
Source: Company data, Credit Suisse estimates
The +17% CAGR between 2014 and 2020E for the EPS reflects this net income increase
(+14% CAGR), as well as the reduction in the number of shares (-13% via cancellations
and treasury shares between early 2014 and mid-2015).
28 May 2015
Dassault Aviation (AVMD.PA) 64
Figure 108: EPS reported vs. EPS adjusted in EUR per share
0.0
20.0
40.0
60.0
80.0
100.0
120.0
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
EPS - reported EPS - adjusted
Source: Company data, Credit Suisse estimates
What is the dividend policy?
We believe that Dassault Aviation's dividend policy may be evolving, but there has been
no official guidance. The group simply indicated that it distributed an increased share of its
earnings in 2014 (23% of the adjusted results vs. 18% previously) and it will likely continue
to rise, with the aim of eventually being in line with European peers (40%). We have
retained a level of 25% of consolidated earnings in our model, progressively rising to 35%
by 2020.
We note that, in the past, the dividend was most often calculated as a third of the parent
company Dassault Aviation SA's net income (i.e., essentially excluding the results of the
completion and sales & support activities in the US). It is then equivalent to the amount
distributed to employees via profit sharing, a reflection of the social policy of Marcel
Dassault, the group's founder: one-third of profits are reinvested, one-third are distributed
to employees and one-third are distributed to shareholders.
Figure 109: One-third of the parent company's EPS has
been distributed to shareholders in the past in EUR per share
Figure 110: We assume 25% of the consolidated results
distributed to shareholders, rising slowly in EUR per share
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
3
6
9
12
15
18
21
24
27
30
33
36
39
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
DPS DPS as % of mother company EPS
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
0
3
6
9
12
15
18
21
24
27
30
33
36
39
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
DPS DPS as % of EPS reported
DPS as % of EPS adjsuted
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
28 May 2015
Dassault Aviation (AVMD.PA) 65
Credit Suisse vs. consensus
We are slightly above consensus (the relevance of which is hampered by the limited
number of forecasts available, ie, just 8 in Thomson Reuters consensus) for revenues and
net income, except in 2018 where our revenues are significantly higher (probably due to
our factoring the defence development contract revenue lumpiness in France). We are
significantly higher than consensus for dividend, with consensus modelling a flat pay-out.
We have a very different net cash position, which may just be linked to the way consensus
treats long-term securities in the balance sheet.
Figure 111: Credit Suisse vs. consensus in EURm / EUR per share
Reported Credit Suisse Consensus CS vs consensus
2014 2015E 2016E 2017E 2018E 2015E 2016E 2017E 2018E 2015E 2016E 2017E 2018E
Revenues 3,680 4,079 4,337 5,004 7,378 3,900 4,215 4,706 5,287 5% 3% 6% 40%
Operating income 353 370 442 594 769 383 473 590 764 -4% -6% 1% 1%
Operating margin (%) 9.6% 9.1% 10.2% 11.9% 10.4% 9.8% 11.2% 12.5% 14.5%
Net income - adjusted 398 443 508 624 755 423 510 613 775 5% 0% 2% -3%
EPS - adjusted 39.7 50.8 58.3 71.6 86.6 46.7 57.4 70.4 90.3 9% 2% 2% -4%
DPS 10.0 12.7 15.7 20.8 26.9 10.8 12.3 15.3 19.5 18% 28% 36% 38%
Pay-out (%) 25% 25% 27% 29% 31% 23% 21% 22% 22%
Net cash 2,397 3,520 3,028 3,121 3,243 1,171 1,318 1,513 932 201% 130% 106% 248%
Source: Company data, Credit Suisse estimates, Thomson Reuters
A large net cash position
Dassault Aviation has been saving cash for a number of years. At one stage, it had more
net cash than revenues (EUR4.6bn vs. sales of EUR4.1bn in 2007).
The company usually only carries a very limited amount of financial debt, usually
corresponding to the employee profit sharing liabilities. It took on some debt when it
bought its stake in Thales in 2009 for EUR1.96bn (fully repaid since) and again when it
bought its own shares from Airbus in 2014 for EUR934m (EUR700m, to be repaid by
2019).
Net cash at the end of 2014 was EUR2.4bn, and we see it rising to EUR4.7bn by 2020E.
A significant part of the cash balance relates to customer down payments (EUR2.3bn at
the end of 2014). The large order intake on the Rafale in 2015 should boost down
payments by an estimated EUR1.4bn (i.e., 20% of the order values). In our view, this will
be partly compensated by the ramp-up of the new Falcon models and the inventory build-
up on the Rafale for the export orders (for instance, three Rafale for Egypt at the end of
2015E, for delivery in early 2016E) as well as work-in-progress build-up on long-term
development contracts.
28 May 2015
Dassault Aviation (AVMD.PA) 66
Figure 112: Net cash available and customer advances net of work-in-progress in EURm
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016E 2018E 2020E
Net cash Thales acquisition / buyback Customer advances net of work-in-progress
Source: Company data, Credit Suisse estimates
The group's FCF will be boosted in 2015 by the prepayments received from Egypt, Qatar
and India (assuming the order is finalised). In subsequent years, it will result from the
combination of increased earnings, inventory build-up on the new Falcon programmes and
on the Rafale export orders.
Figure 113: FCF in EURm
-1,000
-500
0
500
1,000
1,500
2,000
2001 2003 2005 2007 2009 2011 2013 2015E 2017E 2019E
Source: Company data, Credit Suisse estimates
No refundable advances
Refundable advances (or launch aids) were received for the Falcon 2000 in the 1990s
(EUR66m at 1990 financial conditions, corresponding to 30% of the EUR220m
development budget, according to the 1997 budget documents of the French Senate).
We believe that Dassault Aviation carries no more refundable advances on its balance
sheet at the end of 2014. These were included in the financial borrowings, together with
the debt corresponding to employee profit sharing.
28 May 2015
Dassault Aviation (AVMD.PA) 67
Financial income from long-term securities only booked on the sale of the security
At the end of 2014, Dassault Aviation carried EUR2.7bn of long-term securities in its non-
current assets. This is the place where the group stores most of its cash (EUR700m of
cash and cash equivalent in current assets in 2014).
The financial income generated from these securities is booked in profits only upon actual
sale of the securities and held in an Other Comprehensive Income line (net of tax) until
released.
28 May 2015
Dassault Aviation (AVMD.PA) 68
Dassault products and competitors Business jets
Business jets accounted for 73% of Dassault Aviation's revenues in 2014 (EUR2.7bn) and
are almost all booked in USD. The group is focused on high-end jets, with price tags
ranging from c.USD30m for the Falcon 2000S to c.USD60m for the Falcon 8X. Its 20%
market share (2010-2014 average) should start rising again after the current lull, as its
market coverage expands with new products entering in service in 2016 (Falcon 8X) and
2017 (Falcon 5X).
Figure 114: Falcon 7X Figure 115: Falcon 2000LXS
© Dassault Aviation – K. Tokunaga © Dassault Aviation – K. Tokunaga
Figure 116: Falcon 8X Figure 117: Falcon 5X
© Dassault Aviation – Alex Paringaux © Dassault Aviation
Dassault Aviation vs. competitors
Amongst peers, Dassault Aviation is the closest to being a pure play for business jets, with
73% of its sales derived from this area in 2014. For its competitors, business jet revenues
accounted for 25-30% of sales in 2014.
In absolute terms, Dassault is the second smallest company in the business jet industry,
and is focused on the high-end of the market. Gulfstream (owned by General Dynamics)
has the largest sales of business jets with its Aerospace division reporting sales of USD
8.6bn in 2014 (including Jet Aviation support activities).
28 May 2015
Dassault Aviation (AVMD.PA) 69
Figure 118: Business jet sales as a % of total sales (2014) Figure 119: Business jet sales (2014, USDm)
0%
10%
20%
30%
40%
50%
60%
70%
80%
Dassault Cessna (TXT Bombardier Gulfstream(GD)
Embraer
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Gulfstream(GD)
Bombardier Cessna (TXT) Dassault Embraer
Source: Company data Source: Company data
In terms of growth, the fastest growth in the sector comes from Embraer and we expect a
CAGR of c.15% from 2014 to 2017E. At the other end of the spectrum, we see Cessna
(Textron) growing at a CAGR of only 5.7%. We estimate that Gulfstream, which is owned
by General Dynamics, should see a CAGR of 9.7% over the period.
Profitability from the various peers ranges from mid-single digits (Cessna, Bombardier,
Embraer) to the 20% level (Gulfstream). These numbers do not account for unallocated
corporate costs of the groups, but these would not materially change the picture.
For these comparisons, we used a constant EUR/USD exchange rate of 1.33 (2014
average) to convert Dassault's revenues from EUR to USD. The data for Dassault's peers
are based on Credit Suisse's analysts in the US and Brazil.
Figure 120: Total business jet revenues (USDm) Figure 121: Average divisional margin in %
-
2,000
4,000
6,000
8,000
10,000
12,000
2010 2011 2012 2013 2014 2015E 2016E 2017E
Gulfstream (GD) Cessna (TXT)
Bombardier Embraer
Dassault
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
2010 2011 2012 2013 2014 2015E 2016E 2017E
Gulfstream (GD) Cessna (TXT)
Bombardier Dassault (groupe)
Embraer
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Military platforms
Dassault Aviation splits its defence business (27% of 2014 total sales, EUR995m) into
France (EUR770m revenues in 2014) and Export (EUR225m). It provides no detailed
breakdown by product but the largest activity is combat aircraft, complemented by UAVs
and a number of additional military aircraft businesses (support and upgrades). Revenue-
wise, its main active combat aircraft programmes are the Rafale and the Mirage 2000. The
28 May 2015
Dassault Aviation (AVMD.PA) 70
group has an active military fleet of about 1,000 aircraft as at December 2014, of which
40% were in France.
Figure 122: Rafale Figure 123: nEUROn
© Dassault Aviation – K. Tokunaga © Dassault Aviation – G. Gosset
Figure 124: Mirage 2000N Figure 125: Atlantique 2
© Dassault Aviation – F. Robineau © Alex Paringaux
Dassault Aviation's combat revenues currently rank last in the sample below. The leading
firms are all also involved in electronics (BAE Systems, for instance, in the US). However,
Dassault Aviation is one of the industry's most sensitive to combat aircraft activities, with
27% of its 2014 revenues in this domain. This will likely rise to one-third and more from
2017E onwards.
28 May 2015
Dassault Aviation (AVMD.PA) 71
Figure 126: Combat aircraft estimated revenues In EURm
Figure 127: Combat aircraft estimated revenues As a % of sales
0
2,000
4,000
6,000
8,000
10,000
12,000S
aab
Lock
heed
Mar
tin
BA
E S
yste
ms
Boe
ing
Fin
mec
cani
ca
Airb
us
Das
saul
t Avi
atio
n
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
Saa
b
BA
E S
yste
ms
Das
saul
t Avi
atio
n
Lock
heed
Mar
tin
Fin
mec
cani
ca
Boe
ing
Airb
us
Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research
28 May 2015
Dassault Aviation (AVMD.PA) 72
Credit Suisse HOLT® perspective
Dassault Aviation through the HOLT Framework:
In HOLT, Dassault Aviation qualifies as Restructuring with strong momentum, a
compelling valuation, but a low operational quality. Its CFROI® level fell from 10.5% to
5.4% in 2014. A decrease in sales growth was largely responsible for the fall in CFROI.
The HOLT default DCF (based on consensus numbers) for Dassault Aviation shows 19%
upside potential (EUR1,439).
Credit Suisse forecasts for 2015-2019:
We have incorporated our forecasts through the HOLT independent valuation framework.
The CFROI charts in Figure 128 reflect our forecasts for sales, margins and returns.
Based on our assumptions, HOLT calculates an average CFROI of 8.73% for 2015-2019.
HOLT incorporates a real discount rate of 3.3% for the explicit forecast period. Based on
our forecasts, HOLT calculates a real asset growth rate of 1.6% in 2015, which is
expected to rise to 10.1% by 2019.
HOLT assumptions beyond the explicit forecast period
Beyond the explicit forecast window, HOLT assumes the CFROI and discount rate fade to
6%, while asset growth fades to 2.5%, incorporating the economic reality of competition
that causes the CFROI and growth rate to regress to the mean.
As at 26 May, HOLT yields a warranted price of EUR1,499 per share, suggesting 24%
upside potential for Dassault Aviation, broadly consistent with our target price of
EUR1,470.
28 May 2015
Dassault Aviation (AVMD.PA) 73
Figure 128: Dassault Aviation through the HOLT Framework (priced as at 26 May 2015)
Current Price: EUR 1208.90 Warranted Price: EUR 1498.89 Valuation date: 26-May-15
Sales Growth (parallel % point change to forecasts) Dec 13A Dec 14A Dec 15E Dec 16E Dec 17E
EUR -2.0% -1.0% 0.0% 1.0% 2.0% Sales Growth, % 16.5 -19.9 6.7 10.4 15.4
EBITDA Mgn, % 13.7 10.1 11.2 11.7 13.3
Asset Turns, x 0.58 0.5 0.5 0.5 0.5
CFROI®, % 10.5 5.4 6.3 7.6 9.0
Disc Rate, % 4.2 4.0 3.2 3.2 3.2
Asset Grth, % 6.4 0.4 1.6 9.1 10.1
Value/Cost, x 1.4 1.6 1.8 1.7 1.5
Economic PE, x 13.0 29.2 28.1 21.8 16.9
Leverage, % 6.0 11.8 11.4 11.8 12.0
More than
10%
downside
Within 10%More than
10% upside
Source: Credit Suisse HOLT®. CFROI and HOLTare trademarks or registered trademarks of Credit Suisse Group AG or its affiliates in the United States and other countries.
57%
1.0% 15% 22% 31% 40% 49%
2.0% 21% 29% 37% 47%
25% 34%
0.0% 9% 16% 24% 33%
HO
LT
-
C
red
it S
uis
se A
naly
st
Scen
ari
o D
ata
DASSAULT AVIATION (AVMD)
EB
ITD
A M
arg
in (
para
llel
% p
oin
t ch
an
ge
to f
ore
casts
)
-2.0% -3% 3% 11% 18%
42%
27%
-1.0% 3% 10% 17%
-30
-20
-10
0
10
20
30
40
50
2010 2012 2014 2016 2018 2020
Sales Growth (%)
0
2
4
6
8
10
12
14
16
18
2010 2012 2014 2016 2018 2020
EBITDA Margin
0.0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
2010 2012 2014 2016 2018 2020
Asset Turns (x)
0
2
4
6
8
10
12
2010 2012 2014 2016 2018 2020Historical CFROI Historical Transaction CFROIForecast CFROI Forecast CFROICFROI Discount Rate
CFROI & Discount Rate (in %)
-15
-10
-5
0
5
10
15
20
2010 2012 2014 2016 2018 2020
Historical Asset Growth Rate Forecast GrowthForecast Growth RAGRNormalised Growth Rate
Asset Growth (in %)
Source: Credit Suisse HOLT, company data, Credit Suisse estimates
28 May 2015
Dassault Aviation (AVMD.PA) 74
PEERS Figure 129: Dassault Aviation's PEERS
Source: Credit Suisse PEERs
28 May 2015
Dassault Aviation (AVMD.PA) 75
Divisional and financial data Figure 130: Divisional revenues, orders and backlog in EURm
2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
EURUSD
Spot rate 1.37 1.47 1.39 1.33 1.39 1.29 1.33 1.33 1.15 1.15 1.15 1.15 1.15 1.15
Hedge rate 1.24 1.30 1.32 1.27 1.29 1.24 1.26 1.25 1.24 1.24 1.21 1.19 1.19 1.19
Deliveries (number of aircraft)
Falcon 70 72 77 95 63 66 77 66 65 65 70 80 87 87
Rafale - France 13 14 14 11 11 11 11 11 5 10 0 0 0 0
Rafale - Export 0 0 0 0 0 0 0 0 3 3 12 24 23 19
Revenues
Falcon 2,353 2,313 2,440 3,228 2,415 2,797 3,189 2,685 2,943 3,098 3,419 4,039 4,547 4,762
Defence France 881 1,166 739 723 714 936 1,225 770 495 720 270 1,200 270 270
Defence export 851 269 242 236 176 208 179 225 641 519 1,315 2,140 2,009 1,582
Total 4,085 3,748 3,421 4,187 3,305 3,941 4,593 3,680 4,079 4,337 5,004 7,378 6,826 6,614
Order intake
Falcon 5,382 4,625 -3,851 474 1,932 2,532 2,909 3,946
Defence France 644 956 2,276 606 424 634 1,043 441
Defence export 239 241 253 186 507 159 213 252
Total 6,265 5,822 -1,322 1,266 2,863 3,325 4,165 4,639
Orders (number of aircraft)
Falcon 212 115 -163 -9 36 58 64 90
Rafale - France 0 0 60 0 0 0 0 0 0
Rafale - Export 0 0 0 0 0 0 0 0 84
Book-to-bill
Falcon 2.3x 2.0x -1.6x 0.1x 0.8x 0.9x 0.9x 1.5x
Defence France 0.7x 0.8x 3.1x 0.8x 0.6x 0.7x 0.9x 0.6x
Defence export 0.3x 0.9x 1.0x 0.8x 2.9x 0.8x 1.2x 1.1x
Total 1.5x 1.6x -0.4x 0.3x 0.9x 0.8x 0.9x 1.3x
Backlog
Falcon 11,692 13,989 7,638 4,889 4,200 3,756 3,321 4,437
Defence France 2,698 2,559 4,066 3,948 3,675 3,356 3,173 2,876
Defence export 600 512 616 564 875 879 885 904
Total 14,990 17,060 12,320 9,401 8,751 7,991 7,379 8,217
Source: Company data, Credit Suisse estimates
Figure 131: Data per share in millions, unless otherwise stated
Data per share 2007 2008 2009 2010 2011 2012r 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Number of shares (average) 10.126 10.126 10.126 10.126 10.126 10.126 10.126 10.014 9.214 9.214 9.214 9.214 9.214 9.214
Buy-back -0.953
Treasury shares 0.041 0.501 0.501 0.501 0.501 0.501 0.501
Number of shares for EPS 10.126 10.126 10.126 10.126 10.126 10.126 10.126 10.014 8.713 8.713 8.713 8.713 8.713 8.713
EPS 37.8 37.9 25.4 26.4 31.9 49.6 45.4 28.2 36.9 53.4 66.7 81.7 94.8 102.0
EPS adjusted - - 31.1 36.6 40.1 50.6 48.1 39.7 50.8 58.3 71.6 86.6 97.4 102.4
DPS 10.6 5.8 8.8 10.7 8.5 9.3 8.9 10.0 12.7 15.7 20.8 26.9 32.2 35.8
Source: Company data, Credit Suisse estimates
28 May 2015
Dassault Aviation (AVMD.PA) 76
Figure 132: P&L and P&L adjusted (Dassault definition) in EURm
2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Net sales 4,085 3,748 3,421 4,187 3,305 3,941 4,593 3,680 4,079 4,337 5,004 7,378 6,826 6,614
Other revenues 23 8 5 40 61 43 39 42 40 40 40 40 40 40
Change in inventories 221 465 -73 -622 55 -30 -147 118 150 200 200 -800 0 0
External purchases -2,619 -2,281 -1,698 -1,631 -1,935 -2,222 -2,623 -2,434 -2,554 -2,662 -3,092 -4,239 -4,003 -3,888
As a % of production -60.8% -54.2% -50.7% -45.7% -57.6% -56.8% -59.0% -64.1% -60.4% -58.7% -59.4% -64.4% -58.6% -58.8%
Value added 1,710 1,940 1,655 1,974 1,486 1,733 1,863 1,406 1,715 1,915 2,152 2,379 2,863 2,767
As a % of production 39.5% 46.0% 49.4% 54.8% 43.4% 43.8% 41.5% 36.6% 40.2% 41.8% 41.0% 36.0% 41.7% 41.6%
Payroll -988 -1,030 -988 -1,002 -994 -1,077 -1,079 -1,061 -1,064 -1,123 -1,188 -1,263 -1,319 -1,361
As a % of production -22.8% -24.4% -29.5% -27.8% -29.1% -27.2% -24.1% -27.6% -24.9% -24.5% -22.7% -19.1% -19.2% -20.5%
Taxes -54 -63 -63 -63 -61 -65 -65 -58 -60 -67 -75 -83 -100 -97
D&A -66 -80 -91 -92 -82 -72 -76 -71 -81 -75 -81 -83 -84 -89
As a % of production -1.5% -1.9% -2.7% -2.5% -2.4% -1.8% -1.7% -1.9% -1.9% -1.6% -1.5% -1.3% -1.2% -1.3%
Other op. inc. and exp. -99 -321 -120 -227 28 29 -145 137 -140 -207 -215 -182 -504 -329
Operating income 503 446 393 591 377 547 498 353 370 442 594 769 855 892
As a % of sales 12.3% 11.9% 11.5% 14.1% 11.4% 13.9% 10.9% 9.6% 9.1% 10.2% 11.9% 10.4% 12.5% 13.5%
Income from cash 68 57 11 7 7 9 9 7 12 16 14 15 16 20
Cost of financial debt -11 -12 -35 -39 -24 -12 -7 -7 -25 -25 -24 -23 -15 -7
Financial inc. and exp. 5 16 54 6 30 102 86 -122 -89 16 16 16 16 16
Net financial inc / exp. 62 61 29 -27 14 98 88 -123 -102 8 6 8 18 28
Share of equity associates 0 0 -66 -128 41 83 78 132 148 173 191 207 258 290
Income tax -183 -122 -99 -169 -109 -225 -205 -79 -94 -158 -210 -272 -305 -322
As a % of profit before tax -32.4% -24.1% -23.6% -30.0% -27.9% -35.0% -34.9% -34.5% -35.0% -35.0% -35.0% -35.0% -35.0% -35.0%
Net income 382 384 257 267 323 502 459 283 322 465 581 712 826 888
Attributable to NCI 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Net income attributable to
owners of parent company
382 384 257 267 323 502 459 283 322 465 581 712 826 888
2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
P&L - adjusted (company definition)
Net sales 3,421 4,187 3,305 3,941 4,593 3,680 4,079 4,337 5,004 7,378 6,826 6,614
Operating income 393 591 377 547 498 353 370 442 594 769 855 892
Adjustment 0 0 0 0 0 0 0 0 0 0 0 0
Operating income - adjusted 393 591 377 547 498 353 370 442 594 769 855 892
Financial income 29 -27 14 98 88 -123 -102 8 6 8 18 28
Adjustment -7 -2 14 -83 -73 166 120 0 0 0 0 0
Financial income - adjusted 29 -27 14 16 15 43 18 8 6 8 18 28
Tax -99 -169 -109 -225 -205 -79 -94 -158 -210 -272 -305 -322
Adjustment 0 0 0 28 26 -58 -42 0 0 0 0 0
Tax - adjusted -99 -169 -109 -197 -179 -137 -136 -158 -210 -272 -305 -322
Affiliates -66 -128 41 83 78 132 148 173 191 207 258 290
Adjustment 66 128 -41 63 75 7 43 43 43 43 23 4
Affiliates - adjusted 0 0 0 146 153 139 190 216 234 250 282 294
Net income 257 267 323 502 459 283 322 465 581 712 826 888
Adjustment 59 126 -27 9 28 115 121 43 43 43 23 4
Net income adjusted 315 394 296 512 487 398 443 508 624 755 849 892
Source: Company data, Credit Suisse estimates
28 May 2015
Dassault Aviation (AVMD.PA) 77
Figure 133: Balance sheet in EURm
Balance sheet 2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Assets
Goodwill 14 14 14 14 14 14 14 14 14 14 14 14 14 14
Intangibles 74 71 62 51 44 39 29 23 13 12 10 8 5 2
PPE 413 438 459 438 426 406 384 417 454 518 581 572 557 557
Equity affiliates 4 5 1,861 1,727 1,680 1,648 1,676 1,600 1,557 1,514 1,471 1,428 1,405 1,401
Available for sale securities 3,663 3,943 3,218 3,943 3,186 3,263 3,127 2,797 2,372 2,394 2,417 2,440 2,463 2,487
o/w listed 3,552 3,866 3,121 3,825 3,066 3,132 2,993 2,673 2,249 2,271 2,294 2,317 2,340 2,363
o/w non-listed 55 59 72 82 87 96 95 73 73 73 73 73 73 73
o/w Embraer 56 18 25 35 32 36 39 51 51 51 51 51 51 51
Other financial assets 31 31 32 32 32 34 35 34 34 34 34 34 34 34
Deferred tax assets 10 29 53 137 203 198 192 306 455 649 805 1,004 691 1,032
Total non-current assets 4,209 4,530 5,700 6,342 5,586 5,601 5,457 5,190 4,899 5,136 5,332 5,500 5,169 5,527
Inventories and w-i-p 3,004 3,429 3,399 2,792 2,799 2,917 2,687 3,092 3,576 4,183 4,565 4,649 4,619 4,259
Trade and other receivables 501 396 477 520 536 490 551 723 559 654 823 910 842 815
Advances to suppliers 89 147 178 152 154 185 79 93 168 178 206 303 281 272
Derivatives 513 447 650 285 179 248 312 124 124 124 124 124 124 124
Cash and cash equivalent 1,266 824 616 887 922 950 983 708 2,256 1,742 1,762 1,811 2,148 2,645
Total current assets 5,372 5,243 5,320 4,636 4,590 4,790 4,611 4,739 6,682 6,880 7,479 7,797 8,012 8,114
Total assets 9,581 9,773 11,020 10,978 10,176 10,391 10,068 9,929 11,581 12,015 12,811 13,297 13,181 13,642
Liabilities
Share capital 81 81 81 81 81 81 81 74 70 70 70 70 70 70
Reserves 2,394 2,850 3,181 3,357 3,519 4,714 5,141 4,064 3,851 4,206 4,650 5,181 5,772 6,380
FX differences / OCI 893 731 872 705 539 -48 -110 -3 0 0 0 0 0 0
Treasury shares 0 0 0 0 0 0 0 -40 -40 -40 -40 -40 -40 -40
Attributable net income 382 384 257 267 323 0 0 0 0 0 0
Total equity / parent 3,751 4,047 4,391 4,410 4,462 4,747 5,112 4,096 3,882 4,236 4,680 5,211 5,802 6,411
Non-controlling interests 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Total Equity 3,751 4,047 4,391 4,411 4,462 4,748 5,112 4,096 3,882 4,237 4,680 5,211 5,803 6,411
Long term borrowings 197 209 359 258 277 264 205 893 893 893 843 793 193 193
Deferred tax liabilities 117 12 106 0 0 0 0 0 0 0 0 0 0 0
Total non-current liabilities 314 221 466 258 277 264 205 893 893 893 843 793 193 193
Trade and other payables 904 956 648 752 729 768 826 835 860 915 1,056 1,557 1,440 1,395
Tax and employee-related 274 209 216 235 209 242 262 251 279 297 343 505 468 453
Customer advances 3,590 3,415 2,958 2,776 2,898 3,043 2,294 2,271 4,134 4,159 4,387 3,714 3,740 3,624
Short term borrowings 65 49 1,402 1,390 437 58 63 92 92 92 92 92 92 92
Current provisions 682 876 939 1,156 1,165 1,268 1,306 1,328 1,276 1,259 1,247 1,262 1,282 1,310
Derivatives 0 0 0 0 0 0 0 163 163 163 163 163 163 163
Total current liabilities 5,516 5,505 6,163 6,309 5,437 5,380 4,751 4,941 6,806 6,885 7,288 7,293 7,185 7,038
Total equity and liabilities 9,581 9,773 11,020 10,978 10,176 10,391 10,068 9,929 11,581 12,015 12,811 13,297 13,181 13,642
2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Net cash calculation
Available for sale securities 3,552 3,866 3,121 3,825 3,066 3,132 2,993 2,673 2,249 2,271 2,294 2,317 2,340 2,363
Cash and cash equivalent 1,266 824 616 887 922 950 983 708 2,256 1,742 1,762 1,811 2,148 2,645
Long term borrowings 197 209 359 258 277 264 205 893 893 893 843 793 193 193
Short term borrowings 65 49 1,402 1,390 437 58 63 92 92 92 92 92 92 92
Net cash available 4,555 4,432 1,975 3,063 3,274 3,760 3,708 2,397 3,520 3,028 3,121 3,243 4,203 4,723
Source: Company data, Credit Suisse estimates
28 May 2015
Dassault Aviation (AVMD.PA) 78
Figure 134: Cash-flow statement in EURm
2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E
Net income 382 384 257 267 323 502 459 283 322 465 581 712 826 888
Elimination of net income from
affiliates, net of dividend received
0 0 120 154 -2 -42 -31 -68 -88 -112 -126 -138 -184 -208
Elimination of gains & losses from
disposals of non-current assets
-26 2 0 1 0 0 1 -10 0 0 0 0 0 0
Change in fair value of hedging
instruments
0 0 0 -1 18 -82 -73 166 0 0 0 0 0 0
Income tax 183 122 99 169 109 225 205 79 94 158 210 272 305 322
Net change in D&A and provisions 198 289 147 294 45 100 156 -15 -10 6 -5 -2 -2 -4
Net cash from operations before
WCR and taxes
738 797 623 885 493 704 717 434 318 517 660 843 945 998
Income taxes paid -208 -217 -102 -233 -153 -205 -209 -103 -103 -173 -231 -299 -336 -354
Change in inventories -183 -425 29 607 -7 -118 230 -405 -484 -607 -382 -84 30 360
Change in advances to suppliers 17 -58 -31 26 -2 -30 106 -14 -75 -11 -27 -98 23 9
Change in trade and other receivables -57 105 -81 -42 -16 46 -61 -172 164 -95 -169 -87 68 26
Change in fair value of hedging
instruments
-3 3 -4 0 0 0 0 0 0 0 0 0 0 0
Change in customer advances 687 -175 -457 -182 122 145 -749 -22 1,863 24 228 -673 26 -116
Change in trade and other payables 110 52 -308 104 -23 39 58 9 26 55 141 501 -117 -45
Change in tax and employee-related
liabilities
24 -65 7 19 -26 34 20 -11 28 18 46 163 -38 -14
Consolidation reclassifications /
restatements
-36 -40 2 -6 2 -7 0 7 0 0 0 0 0 0
Increase / decrease of WCR 558 -604 -844 526 50 109 -397 -608 1,522 -616 -165 -278 -7 220
Total cash from operating activities 1,087 -24 -323 1,178 391 609 111 -277 1,736 -272 264 266 602 864
Purchases of intangibles and PPE -94 -141 -114 -58 -51 -60 -64 -91 -112 -142 -157 -87 -82 -87
Purchases of investments -3 -2 -2 -1 -1 -6 -2 0 0 0 0 0 0 0
Disposals in fixed assets 92 15 11 16 3 21 14 27 10 10 50 50 50 0
Net cash from acquisitions and sales of
subsidiaries
0 0 -1,959 0 -26 0 0 0 0 0 0 0 0 0
Total cash from investing activities -5 -128 -2,063 -43 -75 -46 -52 -65 -102 -132 -107 -37 -32 -87
FCF 1,085 -150 -425 1,135 342 569 62 -342 1,635 -404 158 230 571 777
Net change in available for sale
marketable securities
-830 -193 745 -684 754 -46 139 299 0 0 0 0 0 0
Change in equity items 0 0 0 0 0 0 0 -934 -451 0 0 0 0 0
Increase in borrowings 84 109 1,588 1,349 516 95 100 790 0 0 0 0 0 0
Repayment of borrowings -89 -101 -83 -1,453 -1,450 -487 -153 -121 0 0 -50 -50 -600 0
Dividend paid -75 -107 -59 -89 -108 -86 -94 -90 -87 -111 -137 -181 -234 -280
Total cash from financing activities -910 -293 2,191 -877 -288 -524 -8 -56 -539 -111 -187 -231 -834 -280
FX fluctuations -55 17 -12 22 8 -10 -19 75 0 0 0 0 0 0
Change in cash & cash equivalent 117 -429 -207 280 35 29 33 -323 1,096 -514 -29 -1 -263 497
Opening net cash 1,126 1,243 814 607 887 922 950 983 660 1,756 1,242 1,212 1,211 948
Closing net cash 1,243 814 607 887 922 950 983 660 1,756 1,242 1,212 1,211 948 1,445
Source: Company data, Credit Suisse estimates
28 May 2015
Dassault Aviation (AVMD.PA) 79
Companies Mentioned (Price as of 26-May-2015)
Airbus Group (AIR.PA, €63.49) BAE Systems (BAES.L, 514.5p) Boeing (BA.N, $142.8) Bombardier Inc (SVS) (BBDb.TO, C$2.46) Dassault Aviation (AVMD.PA, €1208.9, OUTPERFORM, TP €1470.0) Embraer (ERJ.N, $31.09) GKN (GKN.L, 367.0p) General Dynamics Corporation (GD.N, $137.99) Lockheed Martin (LMT.N, $190.51) Meggitt (MGGT.L, 512.0p) QinetiQ (QQ.L, 236.8p) Rolls-Royce (RR.L, 1009.0p) Safran (SAF.PA, €66.03) Textron (TXT.N, $45.7) Thales (TCFP.PA, €57.45) Zodiac Aerospace (ZODC.PA, €33.69)
Disclosure Appendix
Important Global Disclosures
I, Olivier Brochet, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage univers e which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attract ive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 1 2-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, wh ich was in operation from 7 July 2011.
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Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.
28 May 2015
Dassault Aviation (AVMD.PA) 80
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 42% (53% banking clients)
Neutral/Hold* 39% (50% banking clients)
Underperform/Sell* 16% (44% banking clients)
Restricted 3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.
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Price Target: (12 months) for Dassault Aviation (AVMD.PA)
Method: We valued the comapny using a DCF to capture its long term value (8% discount rate, 2.5% growth to perpetuity), a 2018E SOTP based on mid-cycle EV/sales multiples (as the company does not breakdown its profitability by activity) and a multiple comparison with peers to take into account the shorter term outlook. We include the value of Dassault's 25% stake in Thales at our TP for that stock.
Risk: Risks include a strenghtening of the euro vs the US dollar, difficulties in a programme which would delay deliveries and increase mitigation costs, a slowdown of the business jet market, some delay in the signature of the rafale contract in India, difficulties at Thales (a 25% associate). Also, if Airbus does not sell its remaining stake, the liquidity of the stock will remain subpar. At the same time, the prospect of a sale may also impede the stock's growth.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (AIR.PA, SAF.PA, BA.N, BAES.L, BBDb.TO, ERJ.N, GD.N, LMT.N, ZODC.PA) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (SAF.PA, BA.N, BBDb.TO, GD.N) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (AIR.PA, BAES.L) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (BA.N, BBDb.TO) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (SAF.PA, BA.N, BBDb.TO, GD.N) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (AVMD.PA, AIR.PA, MGGT.L, SAF.PA, BA.N, BAES.L, BBDb.TO, ERJ.N, GD.N, LMT.N, ZODC.PA, GKN.L) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (AIR.PA, BAES.L) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (BA.N, GD.N, LMT.N).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (SAF.PA, RR.L, GKN.L).
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (AVMD.PA, TCFP.PA, AIR.PA, MGGT.L, SAF.PA, BA.N, BAES.L, BBDb.TO, ERJ.N, GD.N, LMT.N, TXT.N, RR.L, ZODC.PA, GKN.L) within the past 12 months
28 May 2015
Dassault Aviation (AVMD.PA) 81
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Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
Credit Suisse Securities (Europe) Limited ..................................................................................................... Olivier Brochet ; Ashlee Ramanathan
Important Credit Suisse HOLT Disclosures
With respect to the analysis in this report based on the Credit Suisse HOLT methodology, Credit Suisse certifies that (1) the views expressed in this report accurately reflect the Credit Suisse HOLT methodology and (2) no part of the Firm’s compensation was, is, or will be directly related to the specific views disclosed in this report.
The Credit Suisse HOLT methodology does not assign ratings to a security. It is an analytical tool that involves use of a set of proprietary quantitative algorithms and warranted value calculations, collectively called the Credit Suisse HOLT valuation model, that are consistently applied to all the companies included in its database. Third-party data (including consensus earnings estimates) are systematically translated into a number of default algorithms available in the Credit Suisse HOLT valuation model. The source financial statement, pricing, and earnings data provided by outside data vendors are subject to quality control and may also be adjusted to more closely measure the underlying economics of firm performance. The adjustments provide consistency when analyzing a single company across time, or analyzing multiple companies across industries or national borders. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes the baseline valuation for a security, and a user then may adjust the default variables to produce alternative scenarios, any of which could occur.
Additional information about the Credit Suisse HOLT methodology is available on request.
The Credit Suisse HOLT methodology does not assign a price target to a security. The default scenario that is produced by the Credit Suisse HOLT valuation model establishes a warranted price for a security, and as the third-party data are updated, the warranted price may also change. The default variable may also be adjusted to produce alternative warranted prices, any of which could occur.
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For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
28 May 2015
Dassault Aviation (AVMD.PA) 82
28 May 2015
Dassault Aviation (AVMD.PA) 83
28 May 2015
Dassault Aviation (AVMD.PA) 84
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