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UPDATE 2-Meggitt downgrades outlook as military spending falls
August 5, 2014 / 6:46 AM / 3 years ago

UPDATE 2-Meggitt downgrades outlook as military spending falls

* Cuts FY organic revenue growth guidance to low single digits from mid-single digits

* H1 operating profit down 22 pct

* Raises interim dividend by 8 pct

* Shares down 6.7 pct (Adds CEO, analyst comments, share price)

By Sarah Young

LONDON, Aug 5 (Reuters) - British aircraft parts supplier Meggitt lowered its full-year expectations for organic revenue growth due to bigger than expected declines in U.S. military spending and challenges in its energy business, knocking up to 8 percent off its shares.

The downgrade is Meggitt’s second in nine months. Last November it cut 2013 guidance to low single-digit percent organic revenue growth from mid-single digit growth. The company said on Tuesday it now expects organic revenue growth in the low single digits for 2014, from the mid-single digit level.

Shares in Meggitt fell 8 percent in early trade, hitting their lowest level since March and topping the losers list on Britain’s bluechip index. They were down 5.9 percent at 474.1 pence at 0846 GMT.

“Meggitt continues to lag its peers in both aerospace and defense growth, with inconsistent reasons being given, and its operational issues in energy are an additional negative,” Royal Bank of Canada analysts said in a note.

The company said it had cut its outlook as a result of steeper than expected declines in military spending in the U.S. and delays in its energy business, which provides components to oil and gas companies.

The company had expected a downturn in its military business in the U.S., linked to the repatriation of equipment from Afghanistan, but Chief Executive Stephen Young said it had banked on a reduction being spread over a couple of years which instead had come in the first half of the year. Meggitt’s military unit accounts for about a third of sales.

In its energy unit, which makes up just over 10 percent of sales, financing difficulties at a partner business in Brazil meant that between $25 million to $30 million of sales would move in to next year, Young added.

Meggitt posted underlying operating profit of 151.4 million pounds ($255.3 million) in the first half of the year, 22 percent lower than the same period last year.

The impact of a strong pound on foreign currency exchange trimmed some 53 million pounds off revenues and is likely to continue to have an impact, the company said. The pound gained over 3 percent over the first six months of the year against a trade-weighted basket of currencies.

“I would expect that people would take down their estimates as a result of this statement, modestly,” Young said.

The company had already warned that its performance this year would be “significantly” weighted towards the second-half.

According to Thomson Reuters StarMine’s “SmartEstimate”, which favours top-rated analysts, Meggitt’s 2014 operating profit is forecast to be 334.7 million pounds, compared to a non-adjusted consensus estimate of 386 million pounds.

“Our order book is good. That suggests that we should return to growth in military in the second half,” Young said.

The FTSE-100 firm, which supplies flight displays and wheels to planemakers Airbus and Boeing, said that its civil aerospace business, its largest which accounts for about half of its revenue, gave it confidence in a second-half recovery.

Reflecting overall confidence in its medium-term outlook, Meggitt also said that it would raise its interim dividend by 8 percent to 4.25 pence. ($1 = 0.5930 British Pounds) (Reporting by Sarah Young; Editing by Sophie Walker)

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