Investment positives
We initiate coverage on Cirrus Aircraft with an OUTPERFORM rating and a target price of HK$32.00.
Why an OUTPERFORM rating?
Thriving industry propelled by HNWIs and new infrastructure. According to Knight Frank, over 2023-2027, the population of global high-net-worth individuals (HNWIs), who are potential customers of personal aircraft, could grow at a CAGR of 9.4%. Infrastructure-wise, airports and student pilots are increasing steadily. For example, 35,888 student pilot certificates were added in the US during 2023, according to the Federal Aviation Administration (FAA).
Industry leader with high barriers to entry. In 2023, Cirrus's market share reached 32.0% in the global personal aviation market. As a market leader, Cirrus identified potential entrants in advance as the certification of new aircraft can take five to nine years, according to Frost & Sullivan. Cirrus enhances safety with its proprietary Cirrus Airframe Parachute System (CAPS) and Safe Return safety systems, and its total accident rate per 100,000 flight hours is three times lower than the average in the general aviation industry, per Frost & Sullivan.
Ecosystem provides operating leverage. Cirrus differentiates itself from competitors by offering an ecosystem encompassing production, sales, and after-sales service, which creates potential operating leverage. Cirrus has a first-mover advantage in the considerable investment and lengthy process required for FAA-certified manufacturing.
How do we differ from the market? We believe the market has not fully priced in Cirrus's competitive advantages and operating leverage potential.
Potential catalysts: 2024 annual results could beat estimates due to larger-than-expected operating leverage; potential capacity expansion.
Financials and valuation
Our EPS forecast is US$0.29 in 2024 and US$0.32 in 2025, a CAGR of 10.2% 2022-2025 net profit-wise. Our adjusted EBITDA forecast is US$184mn in 2024 and US$201mn in 2025 based on our assumption of 12% and 11% revenue growth in 2024 and 2025, with potential operating leverage. We initiate coverage on Cirrus Aircraft with OUTPERFORM rating and a target price of HK$32.00, implying 5.9x 2024e EV/adjusted EBITDA (14x 2024e P/E) and 5.4x 2025e EV/adjusted EBITDA (13x 2025e P/E). The stock is trading at 2.6x 2024e EV/EBITDA and 2.1x 2025e EV/EBITDA. Our TP offers 64.9% upside.
Risks
Regulatory risks; macroeconomic uncertainty; production bottleneck and supply constraints; change in consumer preferences; adverse publicity; geopolitical tensions.
