UPDATE 1-Safran core H1 profit rises 16.5 pct, lifts target

Thu Jul 31, 2014 4:19am EDT

(Adds CEO, analyst comments; combines stories)

By Tim Hepher

PARIS, July 31 (Reuters) - French aerospace group Safran raised its profit target on the back of higher-than-expected first-half earnings on Thursday, pushing its shares higher despite slower services growth and rising R&D spending.

The maker of jet engines, optical sensors and security detection equipment said its adjusted recurring operating profit - a measure of underlying performance - rose 16.5 percent to 981 million euros ($1.31 billion) in the half-year.

The results featured a sharp increase in margins at its core aerospace propulsion unit, almost touching 20 percent, while group revenue rose 4.4 percent to 7.208 billion euros.

Safran became the latest aerospace company to take issue with recent investor concerns that the aviation market has reached the top of its business cycle after a prolonged spending spree by airlines that want to save fuel.

"Aerospace activities are still on a very good trend," Chief Executive Jean-Paul Herteman told reporters.

Shares in the company rose 2.5 percent to 45.995 euros in early trading.

Safran upgraded its full-year forecast for growth in recurring profit to a percentage "approaching the mid-teens," rather than the low double digits seen previously. It left its "mid-single-digit" revenue growth target intact.

However, Safran said its widely watched civil aftermarket rose 9.4 percent in the first half, or 6.5 percent in the second quarter, a slowdown from the 12.4 percent seen in the first three months of the year.

Executives said they were confident they could still hit a full-year target of "low- to mid-teens" percentage growth after an unfavourable comparison with last year's second quarter.

"Safran's target for the aftermarket this year looks ambitious, especially given the very tough third-quarter comparison," RBC Capital markets analysts said in a note.

Safran co-produces the engine for the Boeing 737 and some Airbus A320s with General Electric through its CFM venture, which celebrates its 40th anniversary this year.

It has sold 7,500 of the latest version of the engine, known as LEAP, but has to invest in its supply chain to ensure it is ready to keep up with further increases in jet production.

Based on the higher investments in LEAP and other new engines, as well as uncertainty over the timing of payments from government customers, Safran lowered its ambitions for converting profits into cash this year.

RUSSIA SANCTIONS

It said its 2014 free cashflow would now represent 35 percent of recurring income, instead of close to 40 percent.

Herteman said one reason was that Boeing had asked for faster development of the LEAP-1B engine for the next version of its 737, although this did not necessarily mean an earlier entry to service.

"The client has asked us to accelerate things which is a good sign, but it also drags a little on cashflow," he said.

Britain's Rolls-Royce also said on Thursday it was investing in new capacity and restructuring facilities as the result of a large order backlog.

Safran said it would spend more money this year to strengthen its supply chain, but was not interested in buying any of its suppliers outright. R&D costs and capital spending would accordingly rise in 2014, but fall in 2015/16, it said.

Safran meanwhile expects some impact on its Sagem defence business as a result of new European Union and U.S. sanctions on Russia, but said this would not affect the parent group.

"Our defence activities are 10 percent of the group total, and Russia is not by any means the largest customer, so you are talking about something barely material at the Safran level," Herteman told reporters on a conference call.

He did not elaborate on the Sagem technology that would be potentially affected. (1 US dollar = 0.7467 euro) (Editing by James Regan)