Independent research on the U.S. markets, Baptista Research

Baptista Research

Independent research on the U.S. markets

Baptista Research is an independent financial research house focused on the U.S. markets. We provide equity research as well as credit research reports on the top-listed U.S. companies with most of our focus on technology, consumer goods and services, automobiles, industrials, oil and gas, pharma, and healthcare. Our research has served more than 3000 institutional investors including mutual funds, hedge funds, banks, family offices, and various buy-side firms. We operate a research subscription service where institutions, as well as retail investors, can have priority access to all our research. We also have a wide distribution of our research reports across some of the top global financial platforms. Apart from equity research and credit research, we also provide advisory services with respect to mergers & acquisitions (M&A), private equity/ venture capital fundraising, valuation reports, and investment management services for corporates.
Baptista Research is owned and managed by Ishan Majumdar, an ex-Venture Capitalist/ Investment Banker, a Chartered Accountant, and a Masters’ degree holder in Management from HEC Paris. Ishan has nearly a decade of experience in Mergers and Acquisitions, Leveraged Buyouts (LBOs), Venture Capital Investing, Corporate Strategy, and Valuation in front-office roles at the likes of BNP Paribas CIB, Credit Agricole CIB, Groupe Danone, and TIW Private Equity. He has worked on and closed multiple acquisition deals, leveraged buyouts, and start-up investment transactions.

Credit

<ul>
<li>The TransDigm Group is a leading airline component manufacturer across the globe and has a monopolistic position in the markets in which it operates.</li>
<li>The company has had a strong financial performance in 2022 so far and the management is encouraged by the trends in air traffic and the continued recovery in the commercial aerospace market.</li>
<li>Although their results have improved, they are still negatively impacted compared to pre-pandemic levels due to the ongoing decline in air travel demand.</li>
</ul>


The TransDigm Group is a leading airline component manufacturer across the globe and has a monopolistic position in the markets in which it operates.
The company has had a strong financial performance in 2022 so far and the management is encouraged by the trends in air traffic and the continued recovery in the commercial aerospace market.
Although their results have improved, they are still negatively impacted compared to pre-pandemic levels due to the ongoing decline in air travel demand.


TransDigm Group Incorporated: Detailed Credit Analysis & Financial Strength Evaluation Report

Equity Bottom-Up

<ul>
<li>This is our first report on airline component manufacturer, TransDigm.</li>
<li>The company has a monopolistic position in its domain and had a solid quarter with an all-around beat.</li>
<li>The management is encouraged by the trends in air traffic and the continued recovery in the commercial aerospace market.</li>
</ul>


This is our first report on airline component manufacturer, TransDigm.
The company has a monopolistic position in its domain and had a solid quarter with an all-around beat.
The management is encouraged by the trends in air traffic and the continued recovery in the commercial aerospace market.


TransDigm Group Incorporated: Initiation of Coverage – The DART Aerospace Acquisition

European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

On October 28, <a href="https://www.smartkarma.com/entities/meggitt-plc" target="_blank" data-smartkarma-citation="entities:22044:1" rel="noopener">Meggitt PLC (MGGT LN)</a> published Q3 trading update and downgraded guidance for FY 2021: it expects FY 2021 organic revenue to be 5% below FY 2020 on an organic basis (FY 2020 revenue was £1.68 billion), due to supply chain disruption and softer defence trends. Meggitt added that it expects underlying operating profit of between £170 million and £190 million (vs. £192 million in FY 2020).
The UK government ordered a probe into the takeover offer on national security grounds. The CMA is required to investigate the proposed transaction and report to the Secretary of State by March 18, 2022. Meggitt looks forward to engaging constructively with the CMA on its review. In mid-August, the Secretary of State ordered a similar probe into the takeover of <a href="https://www.smartkarma.com/entities/ultra-electronics-holdings-plc" target="_blank" data-smartkarma-citation="entities:22196:1" rel="noopener">Ultra Electronics Holdings (ULE LN)</a> by Cobham, and gave the CMA until January 18, 2022 to investigate the proposed deal.
<a href="https://www.smartkarma.com/entities/parker-hannifin-corp" target="_blank" data-smartkarma-citation="entities:6289:1" rel="noopener">Parker Hannifin (PH US)</a> is an industrial buyer, and does not intend to dismantle Meggitt as it has happened with Cobham (Cobham was quickly dismantled after the takeover by Advent).
Boris is seeking allies beyond the EU, so I do not think the UK Government will block a deal from an American company with committed financing. Rather the Government will ask for guarantees that jobs/technology/manufacturing stay within the UK. With committed deal financing and almost sure green light from the UK Government, there are high chances that this deal will complete.
Meggitt currently trades at 18.8x EV/Fwd EBITDA (vs. the 10.3x median of comparables, source: Capital IQ consensus) and 3.4% FCF yield reflecting the bid premium. The spread is relentlessly tightening.
Gross spread is 6.2% for a deal that can take up to a year to close (and quite possibly 6-9 months). Recommendation is long MGGT LN, TP is 800p as per the Parker-Hannifin offer.

On October 28, Meggitt PLC (MGGT LN) published Q3 trading update and downgraded guidance for FY 2021: it expects FY 2021 organic revenue to be 5% below FY 2020 on an organic basis (FY 2020 revenue was £1.68 billion), due to supply chain disruption and softer defence trends. Meggitt added that it expects underlying operating profit of between £170 million and £190 million (vs. £192 million in FY 2020).
The UK government ordered a probe into the takeover offer on national security grounds. The CMA is required to investigate the proposed transaction and report to the Secretary of State by March 18, 2022. Meggitt looks forward to engaging constructively with the CMA on its review. In mid-August, the Secretary of State ordered a similar probe into the takeover of Ultra Electronics Holdings (ULE LN) by Cobham, and gave the CMA until January 18, 2022 to investigate the proposed deal.
Parker Hannifin (PH US) is an industrial buyer, and does not intend to dismantle Meggitt as it has happened with Cobham (Cobham was quickly dismantled after the takeover by Advent).
Boris is seeking allies beyond the EU, so I do not think the UK Government will block a deal from an American company with committed financing. Rather the Government will ask for guarantees that jobs/technology/manufacturing stay within the UK. With committed deal financing and almost sure green light from the UK Government, there are high chances that this deal will complete.
Meggitt currently trades at 18.8x EV/Fwd EBITDA (vs. the 10.3x median of comparables, source: Capital IQ consensus) and 3.4% FCF yield reflecting the bid premium. The spread is relentlessly tightening.
Gross spread is 6.2% for a deal that can take up to a year to close (and quite possibly 6-9 months). Recommendation is long MGGT LN, TP is 800p as per the Parker-Hannifin offer.

Parker-Hannifin/Meggitt: Update and Spread

On 11 August, <a href="https://www.smartkarma.com/entities/meggitt-plc" target="_blank" data-smartkarma-citation="entities:22044:1" rel="noopener">Meggitt PLC (MGGT LN)</a> said it received an unsolicited, preliminary and non-binding c. £7.1 bn cash takeover proposal, 900p/share, from <a href="https://www.smartkarma.com/entities/transdigm-group-inc" target="_blank" data-smartkarma-citation="entities:2592:1" rel="noopener">Transdigm Group (TDG US)</a>, thus trumping the £6.3 billion agreed and recommended takeover offer from <a href="https://www.smartkarma.com/entities/parker-hannifin-corp" target="_blank" data-smartkarma-citation="entities:6289:1" rel="noopener">Parker Hannifin (PH US)</a>. TransDigm also mentioned the possibility to change the composition of any offer (it could be cash and shares).
Meggitt said it is reviewing the proposal from TransDigm and has provided it with due diligence access. Meggitt stated it plans to carefully consider the terms of any offer and TransDigm's plans for the company, including any impact on employees, stakeholders and customers. It said that there is no certainty any firm offer will be made. 
Nevertheless, Meggitt added that it continues to recommend Parker's 800p/share cash offer, agreed on 2 August. 
<ul>
<li>"The board of Meggitt believes Parker's offer continues to represent an attractive proposition for Meggitt's shareholders and for its broader stakeholders".</li>
<li>Meggitt said that it will be seeking an order giving it permission to convene a shareholder meeting for considering and approving the scheme to implement the acquisition by Parker.</li>
<li>The Times reported that the chairman of Meggitt, Nigel Rudd, has separately called on the UK to block any takeover by bidders who fail to offer binding commitments on investment and jobs.</li>
<li>Meggitt announced on a6 August that it had published documents in relation to the offer, with a date set for a shareholder vote on 21 September.</li>
</ul>
The Takeover Panel has given TransDigm a put up or shut up deadline by which it must make a firm intention to make a formal offer to back up its provisional 900p/share approach by 14 September. The Panel also said that this deadline would cease to apply if a third party other than TransDigm makes a firm offer for Meggitt.
<div>
As a reminder, Parker Hannifin announced the purchase of Meggitt for £6.3 bn, and has pledged with the British Government to maintain employment to avoid potential regulatory problems. The cash offering of 800p/share is a 71% premium over Meggitt's closing on 30 July, for an implied equity value of £6,308.4 mn and implied EV of £7,131 mn and 23.4x EV/21e EBITDA and 44.4x P/21e E (source: Capital IQ consensus). Cost synergies are expected to reach $300 mn.
The main issue with a potential offer from TransDigm is its leverage (8.5x net debt/EBITDA, and 1.5x EBIT/interest, with some of its latest issued bonds trading at 5.19% YTW and rated B- by S&amp;P). If successful in the pursuit of Meggitt, net debt would increase to c. $25 bn and debt issued at an offering yield north of 5.5%, which is why shares could be offered as part of the consideration.
PH's management expects to achieve cost synergies of $300 million (approximately 10% of sales) by the end of the third year at a cost of $240 million. Considering performance of Meggitt in FY2023 comes closer to that of FY2019 (EBITDA of £493 mn in FY 2019 vs. Capital IQ 2023e EBITDA consensus estimates of £461 mn). Using Capital IQ consensus figures and assuming an incremental contribution of $4.3/share to TransDigm, EPS would increase by 17% by FY2024.
Recommendation is maintain long Meggitt, TP 900p. Shares of Meggitt closed at 838.8p on 20 August. Gross (and mostly likely annualised) spread to potential offer is 6.8%. Upside could come from new suitors. There is potential downside risk in case TransDigm's offer does not materialize, although I do not believe the company is bluffing.
</div>

On 11 August, Meggitt PLC (MGGT LN) said it received an unsolicited, preliminary and non-binding c. £7.1 bn cash takeover proposal, 900p/share, from Transdigm Group (TDG US), thus trumping the £6.3 billion agreed and recommended takeover offer from Parker Hannifin (PH US). TransDigm also mentioned the possibility to change the composition of any offer (it could be cash and shares).
Meggitt said it is reviewing the proposal from TransDigm and has provided it with due diligence access. Meggitt stated it plans to carefully consider the terms of any offer and TransDigm's plans for the company, including any impact on employees, stakeholders and customers. It said that there is no certainty any firm offer will be made. 
Nevertheless, Meggitt added that it continues to recommend Parker's 800p/share cash offer, agreed on 2 August. 

"The board of Meggitt believes Parker's offer continues to represent an attractive proposition for Meggitt's shareholders and for its broader stakeholders".
Meggitt said that it will be seeking an order giving it permission to convene a shareholder meeting for considering and approving the scheme to implement the acquisition by Parker.
The Times reported that the chairman of Meggitt, Nigel Rudd, has separately called on the UK to block any takeover by bidders who fail to offer binding commitments on investment and jobs.
Meggitt announced on a6 August that it had published documents in relation to the offer, with a date set for a shareholder vote on 21 September.

The Takeover Panel has given TransDigm a put up or shut up deadline by which it must make a firm intention to make a formal offer to back up its provisional 900p/share approach by 14 September. The Panel also said that this deadline would cease to apply if a third party other than TransDigm makes a firm offer for Meggitt.

As a reminder, Parker Hannifin announced the purchase of Meggitt for £6.3 bn, and has pledged with the British Government to maintain employment to avoid potential regulatory problems. The cash offering of 800p/share is a 71% premium over Meggitt's closing on 30 July, for an implied equity value of £6,308.4 mn and implied EV of £7,131 mn and 23.4x EV/21e EBITDA and 44.4x P/21e E (source: Capital IQ consensus). Cost synergies are expected to reach $300 mn.
The main issue with a potential offer from TransDigm is its leverage (8.5x net debt/EBITDA, and 1.5x EBIT/interest, with some of its latest issued bonds trading at 5.19% YTW and rated B- by S&amp;P). If successful in the pursuit of Meggitt, net debt would increase to c. $25 bn and debt issued at an offering yield north of 5.5%, which is why shares could be offered as part of the consideration.
PH's management expects to achieve cost synergies of $300 million (approximately 10% of sales) by the end of the third year at a cost of $240 million. Considering performance of Meggitt in FY2023 comes closer to that of FY2019 (EBITDA of £493 mn in FY 2019 vs. Capital IQ 2023e EBITDA consensus estimates of £461 mn). Using Capital IQ consensus figures and assuming an incremental contribution of $4.3/share to TransDigm, EPS would increase by 17% by FY2024.
Recommendation is maintain long Meggitt, TP 900p. Shares of Meggitt closed at 838.8p on 20 August. Gross (and mostly likely annualised) spread to potential offer is 6.8%. Upside could come from new suitors. There is potential downside risk in case TransDigm's offer does not materialize, although I do not believe the company is bluffing.


TransDigm/Meggitt: Unsolicited Potential 900p Offer

Pan-Asia Index Flows & Special Situations, Quiddity Advisors

Janaghan Jeyakumar, CFA

Pan-Asia Index Flows & Special Situations

Quiddity Advisors

Pan-Asia Catalysts/Events

In my previous insight, <a href="https://www.smartkarma.com/insights/hexcel-woodward-another-aircraft-supplier-merger" target="_blank" data-smartkarma-citation="insights:35769" rel="noopener">Hexcel-Woodward: Another Aircraft Supplier Merger</a>, I mentioned that some Hexcel shareholders might be unhappy with the weak/non-existent premium offered in the Deal. Although both companies' shares have dropped slightly from post-announcement highs, the spread remains positive implying a low probability of a bump. However, in this insight, we take a closer look at the fundamentals to see if a bump is justified. The Deal which will see US-based aircraft component suppliers <a href="https://www.smartkarma.com/entities/hexcel-corp" target="_blank" data-smartkarma-citation="entities:6699:1" rel="noopener">Hexcel Corp (HXL US)</a> and <a href="https://www.smartkarma.com/entities/woodward-inc" target="_blank" data-smartkarma-citation="entities:11464:1" rel="noopener">Woodward Inc (WWD US)</a> combine in a US$6.4Bn all-stock merger of equals was <a href="https://investors.hexcel.com/investor-news/news-details/2020/Woodward-and-Hexcel-Announce-Merger-of-Equals-to-Create-a-Premier-Integrated-Systems-Provider-Propelling-the-Future-of-Flight-and-Energy-Efficiency/default.aspx" target="_blank" rel="noopener">announced</a> on Sunday 12th January. The transaction is expected to close in the third calendar quarter of 2020 and requires regulatory approvals and shareholder approvals from both companies. The grounding of the Boeing 737 Max has added more pressure to the industry of aircraft component suppliers who were already consolidating in preparation to meet future R&amp;D spending requirements. Despite this rush to consolidate, the Deal feels light considering the magnitude of benefits expected post-completion. So is a bump in terms justified?We think so... for a multiple reasons explained below.

In my previous insight, Hexcel-Woodward: Another Aircraft Supplier Merger, I mentioned that some Hexcel shareholders might be unhappy with the weak/non-existent premium offered in the Deal. Although both companies' shares have dropped slightly from post-announcement highs, the spread remains positive implying a low probability of a bump. However, in this insight, we take a closer look at the fundamentals to see if a bump is justified. The Deal which will see US-based aircraft component suppliers Hexcel Corp (HXL US) and Woodward Inc (WWD US) combine in a US$6.4Bn all-stock merger of equals was announced on Sunday 12th January. The transaction is expected to close in the third calendar quarter of 2020 and requires regulatory approvals and shareholder approvals from both companies. The grounding of the Boeing 737 Max has added more pressure to the industry of aircraft component suppliers who were already consolidating in preparation to meet future R&amp;D spending requirements. Despite this rush to consolidate, the Deal feels light considering the magnitude of benefits expected post-completion. So is a bump in terms justified?We think so... for a multiple reasons explained below.

United States

TransDigm Group, Inc., through subsidiaries, manufactures aircraft components. The Company produces ignition systems and components, gear pumps, mechanical/electromechanical actuators and controls, NiCad batteries/chargers, power conditioning devices, hold-open rods and locking devices, engineered connectors and latches, cockpit security devices, and AC/DC electric motors.

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Transdigm Group (TDG US)

TransDigm Group Incorporated: Detailed Credit Analysis & Financial Strength Evaluation Report

The TransDigm Group is a leading airline component manufacturer across the globe and has a monopolistic position in the markets in which it...

Baptista Research

TransDigm Group Incorporated: Initiation of Coverage – The DART Aerospace Acquisition

This is our first report on airline component manufacturer, TransDigm. The company has a monopolistic position in its domain and had a solid...

Baptista Research

Parker-Hannifin/Meggitt: Update and Spread

6.2% gross spread for a deal very likely to complete. TP is 800p. Meggitt currently trades at 18.8x EV/Fwd EBITDA (vs. the 10.3x median of...

Jesus Rodriguez Aguilar

TransDigm/Meggitt: Unsolicited Potential 900p Offer

Meggitt's Board is playing hard-to-get with TransDigm. Acquisition would be accretive but main obstacle is leverage. Maintain long position in MGGT...

Jesus Rodriguez Aguilar

Hexcel-Woodward: Is the Offer Fair?

In my previous insight, Hexcel-Woodward: Another Aircraft Supplier Merger, I mentioned that some Hexcel shareholders might be unhappy with the...

Janaghan Jeyakumar, CFA

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