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FOCUS Analysts divided over longevity of Asian aerospace boom

27-Sep-2005

LONDON (XFNews) - Aerospace manufacturer Smiths Group PLC today became the latest player in the industry to attribute soaring profits to the Asian aerospace boom, but analysts differ about how long the good times will last.

Chief executive Keith Butler-Wheelhouse forecast continued growth in commercial aviation in the next two to three years and said strong demand for aircraft in the Far East remained among the drivers of the industry's growth.

Smiths' aerospace division lifted sales by 15 pct to 1.158 bln stg and headline operating profits by 18 pct to 118 mln in 2005.

Markets in Asia are "still operating well" while carriers in the Middle East and low cost airlines are also underpinning demand, the company said.

"We're not expecting a slowdown in terms of production rates for at least the next two to three years," Butler-Wheelhouse said.

Analysts appear to agree on the investment potential offered by companies benefiting from the growth, but differ on how long it will last.

Aerospace analyst at Numis Securities, Andrew Gollan, who raised his recommendation on Smiths from hold to add, said China and India are hugely underdeveloped commercial aerospace markets offering vast, long-term demand.

"We all know the growth is going to be fast, but we don't know how fast it's going to be," he said.

"Personally I think there is far more upside there than people think."

Gollan said the industry was enjoying the relatively early stages of an upturn in commercial aircraft production rates, following a cyclical decline compounded by the terror attacks in the US in 2001, the Sars virus, war in Afghanistan and Iraq and soaring oil prices.

While previous upturns in the cycle have lasted about two to three years, Gollan said he believes this upturn may last 4-5 years thanks to the extra impetus provided by the emerging markets in Asia, large order books and cost cutting by aerospace firms.

Gollan said he expected profits made by aerospace firms to continue growing for the next 10 years.

While another September 11-style terrorist attack could hit the industry massively, he added: "Personally, as an investor, I would not get bogged down if there's another 9/11. This is a growth industry."

Nick Cunningham at Panmure Gordon and Co is advising clients to buy into Smiths, saying the company has another two years of growth ahead of it.

However, Cunningham said he believed the Asian influence on future industry growth was being overstated.

The Olympic Games in Beijing in 2008 could be prematurely lifting Chinese demand for aircraft, meaning a trough in demand may follow, Cunningham said.

Although aerospace manufacturers are enjoying the Chinese boom, Australia and Japan are fairly mature markets.

And while demand for jets from another emerging power, India, will take up some of the slack created by any decline in China, the growth still "looks like a bit of a bubble," he said.

"Capacity growth has been running ahead of demand so there will have to be an adjustment at some point," he said.

Cunningham says he believes aircraft deliveries will continue to rise through 2006, 2007 and 2008.

But he said the key issue for investors will be to recognise when the market is beginning to factor in the start of any decline in the industry.

"That probably won't happen next year, but it could take place some time towards the end of 2006 or the start of 2007," Cunningham said.

"Stocks probably have another leg in them, but you're always trying to time the last phase of the good years.

"You don't want to start buying into these things when they're on the downturn."

Smiths has demonstrated its confidence in the region by opening a new aerospace plant in China.

The first phase of the factory, which will serve US engine giant General Electric, is up and running and a second stage has been completed.

Yesterday, jet engine maker Rolls-Royce said at the Aviation Expo China event in Beijing that the passenger air traffic market in the Asia Pacific region will exceed Europe in 2008 and subsequently overtake the US in 2022 to become the largest segment in the world.

China alone is expected to need 2,300 jets to meet annual growth in airline traffic of 9 pct during the next 20 years.

Rolls said 52 pct of the aircraft are forecast to be widebody aircraft, which would be almost twice the global average.

Aerospace parts supplier Aero Inventory said earlier this month that it expects further substantial growth in the year to June 2006 after securing a number of long term contracts in the last couple of years, including the extension of an agreement with Indian aircraft maintenance group GMF Asia.

One analyst who declined to be named said airlines' increasing preference for outsourcing parts supply and management is fuelling the expansion in Aero's business.

"We expect the Far East to grow very rapidly indeed," he said.


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