Documente Academic
Documente Profesional
Documente Cultură
20 April 2012
EADS
A primer on aircraft financing and five reasons to buy EADS
Investment case
Buy
We believe that EADS is the best medium-term investment in the
commercial aviation sector. We reiterate our Buy rating and 38 TP, which indicates 24%
Price 18/04/12 30.6 upside (on a 0.60 dividend, our estimated TSR comes to +26%). This note provides an
12m target 38.0 introduction to aircraft financing - which is a major concern for investors, while we believe
Upside to TP 24.0% these worries are misplaced - and discusses five reasons for buying EADS. 1) Despite the
12m f'cast div 0.60
recent strong share price performance, EADS valuation remains attractive, trading on
12m TSR 26.0%
@ Go to SG website 2013e and 2014e P/E ratios of 12.5x and 9.2x respectively (vs a European civil aerospace
Sector stance sector average of 13.7x and 12.2x). 2) Airbus likely to deliver superior growth. It should
Overweight report significant EBIT improvement in 2012e the A380 industrialisation is going well and
Preferred stock
EADS
A350XWB is advancing in line with the revised schedule. 3) Prospects for the nonAirbus
Least preferred stock businesses are improving, helped by significant cost cuts. Cassidian (Defence & Security)
Boeing faces a difficult outlook in Europe but should benefit from its primary focus on export
markets. The division is also reducing its cost base by 370m (150m retention) over two
years. Astrium (Space) should make steady progress through growth in export markets and
services despite a potentially difficult European institutional market. Eurocopter is targeting
Share price performance a 10% EBIT margin in the medium term with a sharp acceleration from 2013 as NH90
Price MA 100
32
programme losses are eliminated. 4) Currency headwinds are abating. 5) The balance
sheet is strong with 11.7bn cash, enabling EADS to make bolt-on acquisitions and to
27
How we differ from the consensus We are more bullish than the consensus at the EBIT
17 level (+10% in 2014e), as we believe the elimination of A380 losses and restructuring
2011 2012
Source: SG Cross Asset Research programmes in the non-Airbus businesses should enable EADS to report a strong
Volume improvement in margins.
(m)
7.5
5 How we value the stock Our 38 TP is derived from our simplified DCF (terminal margin:
2.5
8%; growth rate: 1%; WACC: 9%). At our TP, the stock would trade on a 2014e P/E of
0
2011 2012
Share data Financial data 12/11 12/12e 12/13e 12/14e Ratios 12/11 12/12e 12/13e 12/14e
RIC EAD.PA, Bloom EAD FP Revenues (bn) 49.13 52.40 54.95 57.28 P/E (x) 16.0 18.2 12.5 9.2
52-week range 31.2-19.8 EBIT margin (%) 3.1 4.6 6.0 7.2 FCF yield (/EV) (%) 8.1 3.9 5.8 8.0
EV 12 (m) 33,435 Rep. net inc. (bn) 1.03 1.47 2.08 2.70 Dividend yield (%) 2.1 2.0 2.4 2.9
Market cap. (m) 24,895 EPS (adj.) () 1.35 1.68 2.45 3.33 Price/book value (x) 2.0 2.3 1.8 1.5
Free float (%) 49.3 Dividend/share () 0.45 0.60 0.75 0.90 EV/revenues (x) 0.54 0.64 0.59 0.55
Performance (%) 1m 3m 12m Payout (%) 35.4 33.1 29.3 27.0 EV/EBIT (x) 20.5 15.7 10.9 7.8
Ordinary shares -1.5 18.5 49.1 Interest cover (x) nm 20.2 32.8 51.9 EV/IC (x) 1.5 1.4 1.3 1.1
Rel. Eurofirst 300 4.2 17.2 58.6 Net debt/equity (%) nm nm nm nm ROIC/WACC (x) 0.5 0.7 0.9 1.0
CAGR 11-14e: +35.1%
Societe Generale (SG) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that SG may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in
making their investment decision. PLEASE SEE APPENDIX AT THE END OF THIS REPORT FOR THE ANALYST(S)
CERTIFICATION(S), IMPORTANT DISCLOSURES AND DISCLAIMERS AND THE STATUS OF NON-US RESEARCH ANALYSTS.
F173904
EADS
Contents
3 Group anatomy business overview
4 Group anatomy performance and valuation
5 Investment summary
7 Five reasons for buying EADS
7 An attractive valuation
9 Strong outlook for Airbus
13 Outlook for non-Airbus businesses is improving
15 Currency headwind abating
17 Strong balance sheet gives options
18 An introduction to aircraft financing
18 Why do airlines need it?
18 Why is it important for A&D stocks?
19 How big is aircraft financing?
21 What are the different forms of aircraft financing?
21 Commercial banks loans
22 Capital markets: Enhanced Equipment Trust Certificates (EETCs)
23 Leasing
24 Export Credit Agencies (ECAs)
27 Manufacturers lenders of last resort
29 Changes in the competitive landscape
29 New entrants: Asian banks become major players
29 Leasing companies now represent a major share
31 A consequence of adapting to economic cycles
32 The latest liquidity crisis a cause for concern?
32 What happened in 2008-2009?
34 Addendum
34 Income statement
34 Summary of divisional sales, EBIT and EBIT margins
35 Summary of cash flow
35 Summary of recent acquisitions
35 EADS shareholding structure
20 April 2012 2
F173904
EADS
EADS is one of the world's biggest Aerospace & Defence companies. The group includes
Airbus, the leading manufacturer of commercial aircraft; Airbus Military, which covers tanker,
transport and mission aircraft; Eurocopter, the world's largest helicopter supplier; and EADS
Astrium, the leading European space company with programmes ranging from Ariane to
Galileo. Cassidian provides comprehensive defence systems solutions and makes EADS a
major partner in the Eurofighter consortium as well as a stakeholder in the missile systems
provider MBDA.
Eurocopter
11%
Airbus
66% Astrium
18%
Eurocopter
17%
20 April 2012 3
F173904
EADS
25
A400M issues
20
15
Problems with A380
10
Strong pick up in civil
aerospace
5
Aug-00
Dec-00
Apr-01
Aug-01
Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
EADS. Historical 12M forward P/E ratio (x)
Despite the share price gaining
more than 70% since January 30
2011, EADS 12M forward P/E
remains close to its historical
average. 25
20
15
10
5
Aug-00
Dec-00
Apr-01
Aug-01
Dec-01
Apr-02
Aug-02
Dec-02
Apr-03
Aug-03
Dec-03
Apr-04
Aug-04
Dec-04
Apr-05
Aug-05
Dec-05
Apr-06
Aug-06
Dec-06
Apr-07
Aug-07
Dec-07
Apr-08
Aug-08
Dec-08
Apr-09
Aug-09
Dec-09
Apr-10
Aug-10
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Jun-11
Feb-11
Feb-12
Aug-10
Dec-10
Aug-11
Dec-11
Apr-10
Oct-10
Apr-11
Oct-11
Apr-12
SG EPS
1.68 2.45 3.33
(adj.)
EPS FY+1 EPS FY+2 EPS FY+3 IBES EPS 1.87 2.55 3.22
Source: SG Cross Asset Research, Datastream
20 April 2012 4
F173904
EADS
Investment summary
This note provides a primer on aircraft financing and explains why we think this issue is not a
threat for Airbus and Boeing deliveries. Accordingly, we believe that EADS remains the best
play in the civil aerospace sector and provide five compelling reasons to buy EADS:
The stock remains inexpensive, trading below its peers on both a P/E and an EV/EBIT
basis. Its 12M forward P/E remains close to its historical average despite a strong
performance of more than 70% since early 2011 and a strong medium-term outlook. When
compared with the global civil aerospace sector, EADS relative 12M forward P/E fell sharply
over this period and is now back to 1, highlighting its robust growth profile and modest
valuation.
Global civil aerospace 12M forward P/E (x) EADS 12M forward P/E relative to civil aerospace sector (x)
20 1.8
18 1.6
16 1.4
14 1.2
12 1.0
10 0.8
8 0.6
6 0.4
May -06
May -07
May -08
May -09
May -10
May -11
May -06
May -07
May -08
May -09
May -10
May -11
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Source: Datastream Source: Datastream
We reiterate our Buy recommendation and 38 target price, giving a 24% upside. Our
38 TP is derived from our simplified DCF (terminal margin: 8%; growth rate: 1%; WACC:
9%). Our DCF is shown below.
20 April 2012 5
F173904
EADS
Airbus should see strong medium-term growth, as the prospects on civil aviation remain
robust. We think most of the problems on the A380 are behind us and the A350XWB is running
to the revised timetable. In addition, the substantial order backlogs have enabled Airbus to
announce progressive production ramp-up, and pricing is also improving on the highly
profitable A320 and A330 families. Despite current investor concerns, we do not see a funding
gap for aircraft deliveries in the medium term, as sufficient funds should be available from the
various sources as necessary.
Airbus production ramp-up
Aircraft Current rate Future rate
A320 38/month 40/month from Q1 2012 & 42/month from Q4 2012
A330 8/month 10/month from Q2 2013 & 11/month from Q2 2014
A380 2/month Up to 3/month in 2012
A350 - Entry into service in H1 2014
Source: Company, SG Cross Asset Research
The non-Airbus businesses should see the benefits of the various restructuring and cost
saving programmes. Cassidian faces some pressure on its home markets (France, Spain,
Germany, UK) but will benefit from export opportunities. The restructuring programme
currently in place should help to improve margins in the medium term. Similarly, Eurocopter
should experience margin improvements as SHAPE shows results and as losses on the NH90
programme are eliminated. We believe Astrium will be a stable source of income in the future.
After suffering considerable currency headwinds in past years (most notably a 900m and a
1,000m headwind on EBIT in 2009 and 2010, respectively), the current weakness of the Euro
against the US Dollar and the improving hedge rates should benefit EADS.
EADS has 11.7bn net cash. This gives room for strong dividend increases and EADS can
continue its bolt-on acquisitions. The group acquired Vector (aviation support and services),
Vizada (satellite services), Satair (aeronautic services) and Metron (air traffic management) in
2011, and should continue to strengthen its position in civil aerospace services.
Aircraft financing remains a cause of concern for investors, as US$ liquidities are tight for
European banks following the latest Eurozone crisis. We believe these fears are overdone in
light of what we experienced during the much deeper crisis of 2008-2009. We did not see any
funding gap, as Export Credit Agencies (ECAs) made good most of the funding shortfall.
120
100
80
60
40
20
0
2003 2004 2005 2006 2007 2008 2009 2010
Source: Companies, SG Cross Asset Research; *Calculated using 2010 exchange rate
20 April 2012 6
F173904
EADS
We reiterate our Buy recommendation on EADS and highlight five compelling reasons why we
think investors should continue to invest in the company.
1. An attractive valuation
EADS share price has enjoyed a strong recovery since the low points of April 2009. After
initially underperforming its peers, EADS has outperformed over the past 18 months. This
outperformance has reflected the strong order intake in civil aerospace as well as increasing
confidence in the recovery of the A380 programme and a shorter-than-expected delay and
lower provision announcement on the A350XWB. However, despite the strong share price,
with appreciation of more than 70% since the beginning of 2011, EADS valuation remains
very attractive the group is trading below its global civil aerospace peers on a 2013e and
2014e P/E basis, as shown in the left-hand side chart below.
Civil aerospace 2013e and 2014e P/E Civil aerospace 2013e and 2014e EV/EBIT
0 0
Meggitt
Meggitt
EADS
EADS
MTU
MTU
Zodiac
Zodiac
Rolls-Royce
Rolls-Royce
Safran
Safran
Boeing
Boeing
Bombardier
Bombardier
Source: Datastream, SG Cross Asset Research Source: Datastream, SG Cross Asset Research
On an EV/EBIT basis, the picture remains broadly the same: even though EADS trades at a
premium to 2013e EV/EBIT, expected superior growth should drive the ratio down in 2014e
and beyond, as shown in the right-hand side graph above.
The stock is also very attractively valued on an enterprise (EV) based valuation. The EV of
EADS is a contentious issue and our definition is as follows:
20 April 2012 7
F173904
EADS
The standard definition of EV is EV = market capitalisation (+/-) debt/cash. For aerospace &
defence companies, as well as large contractors, the problem generally arises in the definition
of net cash/net debt as these companies tend to benefit from large cash advances from
customers (customers usually fund the projects working capital). The issue then is whose
money is this advance payment and how should it be accounted for in the net debt
calculation?
Our approach is to assume that the customer cash advance is used to buy materials to
produce the product to ship to the customer. We assume that the advance will only ever be
returned to the customer in the event of a winding up of the company and even in that event it
will only be the advances that are still in a cash form and not having been spent on purchase
of materials. Accordingly, we net off the cash advance against the inventories on the balance
sheet and assume that the balance is customer money and thus a debt item.
Our EV definition is fairly draconian and conservative as we also treat the full amount of the
repayable government launch aid as a liability as well as pension provisions and only credit
the book value of the stake in Dassault rather than its market value. Under these various
assumptions, we compute an EV for EADS of 33.5bn, giving an EV/sales (2012e) of 0.64!
The following chart shows the 2014e EV/sales vs EBIT margin for the civil biased stocks within
our coverage.
2.5
2.0
2014e EV/Sales (x)
R = 92% Meggitt
Zodiac
1.5
1.0
R olls-Roy ce
Saf ran MTU
EADS
0.5 Boeing
Bombardier
0.0
5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25
The chart shows a strong correlation between the EV/sales ratio and the projected margin.
EADS looks fairly valued when compared with the peer group based on our projected EBIT
margin of 7.0% (SG adjusted). However, we should note that our forecasts are cautious,
allowing for some contingency on the loss elimination target at Airbus and also on the
development of the A350XWB. EADS managements target is for a 10% group margin by
2015 (excluding the contribution from A350XWB) on a /$ rate of 1.30. Clearly, if the group
can get close to this objective, the simple implication is that our and the consensus forecasts
would be subject to major upgrades.
20 April 2012 8
F173904
EADS
Airbus 2011 sales spilt (33.1bn) Airbus EBIT and EBIT margin trend
Airbus military
7% 5,000 15.0
4,000 12.0
3,000 9.0
2,000 6.0
1,000 3.0
0 0.0
2012e
2013e
2014e
2015e
2016e
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-1,000 -3.0
-2,000 -6.0
Airbus
commercial EBIT (m, lhs) EBIT margin (%, rhs)
93%
Source: Company Source: Company, SG Cross Asset Research
Since then, Airbus has, however, been hit by major issues with the A380 (superjumbo jet),
A350XWB (wide-body, composite structure aircraft), and A400M programmes (military
transport). We believe that most of the problems are now behind the company and that Airbus
should be able to deliver strong growth over the medium term on the back of better pricing
and strong increases in the highly profitable A320 and A330 ranges.
14 7
12 6
10 5
8 4
6 3
4 2
2 1
0 0
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011F
2013F
-2 -1
-4 -2
RPMs growth (%, lhs) World real GDP growth (%, rhs)
20 April 2012 9
F173904
EADS
In the IATAs air traffic forecasts for 2012, they anticipate a slowdown compared with the
levels seen in 2010 and 2011: the uncertainty surrounding the global economy, and more
particularly in Europe, forces the association to adopt a cautious look.
Jet fuel as a percentage of operating costs (%) and price trend ($/barrel)
35 1610
30 1380
25 1150
20 920
15 690
10 460
5 230
0 0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Fuel as a % of operating expenses (%, lhs) Jet f uel price ($/b, rhs)
The graph above shows the trend in jet fuel price and its share of operating expenses. It
reached a record 30.7% in 2011, exceeding its previous high of 30.6% in 2008. IATA forecasts
jet fuel prices as high as 32% of airlines operating costs in its central scenario, driving
demand for new generation aircraft which claim to offer savings of up to 25% compared with
the current generation. In addition, future growth is expected to be driven by emerging
markets. The graphs below show the geographical trend in Airbus backlog between 2000 and
2011.
Airbus 2000 backlog by region (1,590 aircraft) Airbus backlog by region (4,437 aircraft)
Other North
1% America
North Lessors 11%
America 20%
27% Europe
12%
Lessors
41%
Latin America
& Af rica
9%
20 April 2012 10
F173904
EADS
The most dramatic change comes from the Asia/Pacific region, the share of which increased
from 3% in 2000 to 37% in 2011. Similarly, other emerging markets expanded, with Latin
America going from 7% to 9% and the Middle East from 2% to 10%. Conversely, the share of
western countries stagnated, rising from 47% to 49%. This trend is likely to continue, as
population growth, urban concentration and economic development will drive growth in
emerging markets, as shown in the following graphs.
RPK (trillion) trend in emerging/developed economies Biggest 20-year growth in RPK by route (%)
12.0
Domestic India
10.0 Domestic China
Middle east - US
8.0 70%
Asia - China
6.0
China - US
4.0 57% Domestic Brazil
37% Intra Asia
2.0 30%
43% India - Middle East
63%
0.0 China - Western Europe
1970 1990 2010 2030F
Central Europe - Western Europe
Traf f ic within & between USA, Canada, Western Europe and Japan
Rest of world 0 2 4 6 8 10 12
Source: EADS, SG Cross Asset Research Source: EADS, SG Cross Asset Research
Unsurprisingly, emerging economies are expected to represent 70% of the worlds passenger
traffic by 2030, up from 57% in 2010. Growth should be led by the Indian and Chinese
domestic markets.
However, Airbus is still making very large losses at the operating level (estimated at around
1bn) owing to three factors: the need for large customer field support as the aircraft matures,
remedial work, and the under-recovery of manufacturing overhead.
20 April 2012 11
F173904
EADS
programme was launched with a new wider fuselage and a structure made from advanced
materials combining composites (53%), titanium and advanced aluminium alloys.
The re-launch of the A350 as A350XWB caused a major problem for Airbus, as it had signed
some 125 orders and was contractually obliged to deliver the A350. The group had to offer
customers the much more expensive A350XWB at a discounted price and booked losses of
500m and 850m in 2006 and 2007, respectively.
Until now,
Airbus 2006: Nov. 2011: Apr. 2012: H1 2014: close to
A350XWB The A350XWB Entry Into Service Entry into Final Projected Entry 700 gross
programme was delayed 6m to H1 Assembly Line Into Service
programme launched from 2014, 200m
orders have
development been
the A350 charge taken booked
After these initial problems, the numerous issues with the A380 and Boeings three-year delay
on the 787, management has generally adopted a cautious approach towards the
development of the A350XWB. We understand that the groups contracts with launch
customers are less onerous on penalty payments for late deliveries than was the case with the
A380, and Airbus has kept most of the mission critical work in-house whereas Boeing
outsourced some of the large structures. Airbus has also adopted the stop and fix policy on
the A350XWB with the aim of avoiding the duplication of problems across a number of
development aircraft.
Late last year the company announced a six-month delay with first flight re-scheduled for
early 2013, entry into service in H1 2014, and a 200m provision, a move which did not panic
investors as they were fearing a longer delay and a much higher provision.
The first sections are currently arriving on the final assembly line in Toulouse, and Airbus
announced the final assembly of the first A350 XWB on 5 April. The programme is seen as
challenging and the schedule is tight, but management is confident about delivering on the
revised timetable.
20 April 2012 12
F173904
EADS
EADS 2012e divisional sales (52.4bn) Non-Airbus 2012e EBIT composition (1,280m)
Other 1,400
Cassidian businesses
11%
3% 1,200
1,000
Astrium
10% 800
600
400
Eurocopter
200
11%
Airbus -
65%
Cassidian
Holding
Eurocopter
Astrium
Others
non-Airbus
EBIT
Source: SG Cross Asset Research, pre-eliminations Source: SG Cross Asset Research
We discuss prospects for each of the business segments in the paragraphs below.
Eurocopter 2011 sales split (5.4bn) Eurocopter EBIT and EBIT margin trend
2013e
2014e
2015e
2016e
2004
2005
2006
2007
2008
2009
2010
2011
38%
In 2010 the division suffered from a 120m one-off on the NH90 programme and restructuring
charges, which together with higher R&D costs lowered EBIT by 30% to 183m. The SHAPE
restructuring plan launched in 2010 targeted 200m costs savings at Eurocopter. We believe
most of the one-time effects are behind us, and we forecast a 7-8% margin in 2016e, as NH90
programme losses are eliminated (group targets 10% in the medium term). In addition, the
acquisition of Vector in 2011 should benefit the divisions services activities, which generally
deliver higher margins.
20 April 2012 13
F173904
EADS
Cassidian 2011 sales split (5.8bn) Cassidian EBIT and EBIT margin trend
400 8.0
300 6.0
200 4.0
2012e
2013e
2014e
2015e
2016e
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-100 -2.0
-200 -4.0
Air sy stems
40%
EBIT (m, lhs) EBIT margin (%, rhs)
Cassidian has seen a steady improvement in its performance since reporting losses in 2000
and 2001, which were the result of lower sales and restructuring provisions. Cassidian faces a
potentially difficult outlook in Europe, where its domestic markets France, Spain, Germany
and the UK- represent c.70% of its revenues. The division should, however, make steady
progress as it is looking to reduce its cost base by 370m over two years (150m retention),
supporting a margin recovery in 2012 following a dip in 2011.
Astrium 2011 sales split (5.0bn) Astrium EBIT and EBIT margin trend
500 20.0
400 15.0
Satellites
serv ices 300
10.0
31% 200
Space 100 5.0
transportation
0 0.0
44%
2012e
2013e
2014e
2015e
2016e
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
-100 -5.0
-200
-10.0
-300
-400 -15.0
-500 -20.0
Satellites
25% EBIT (m, lhs) EBIT margin (%, rhs)
20 April 2012 14
F173904
EADS
The division suffered heavy losses in the early 2000s, owing to a depressed space market and
restructuring costs. From 2004 to 2010, the division made good progress and reported a
gradual recovery in operating margins as shown in the chart above. However, the division had
to book a 23m restructuring charge in 2011, resulting in a 5.4% margin (vs 5.7% in 2010). We
do not expect Astrium to experience dramatic changes in the future, but instead it should
remain broadly stable, supported by a strong order backlog.
EADS deals with this currency mismatch by hedging its US$ exposure mostly by using
forward US$ contracts. We estimate that a 10-cent move in the /$ rate has a c.1bn impact
on group EBIT. More recently, the group has also been encouraging its customers to sign
contracts in euros, as this reduces its US$ exposure by the same amount: >$5bn of future
sales had been converted into euros at end 2011.
We show the currency hedge book year-on-year impact on reported consolidated EBIT in the
following chart. The chart shows the achieved hedge rate, the average spot rate for the year,
and the year-on-year (yoy) currency impact on the groups reported EBIT.
1,200 1.5
1,000 1.4
800 1.3
600 1.2
400 1.1
200 1.0
- 0.9
-200 0.8
-400 0.7
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012e
2013e
2014e
2015e
2016e
Currency headwind/(benef it) (m, lhs) Av g. Achiev ed hedge rate /$ (rhs) Av g. spot rate /$ (rhs)
The groups achieved /$ hedge rate has risen from around parity in 2003 to 1.37 in 2011
EADS suffered significant yoy headwinds in 2005, 2006, 2009 and 2010. Indeed, 2010 saw a
nearly 1bn currency headwind to EBIT compared with 2009.
The next chart shows the currency hedge currently in place at EADS, mostly using forward
contracts. The euros fall against the US$ during the ongoing euro crisis is a welcome
change for EADS. The groups average hedge rate for 2012 is 1.36 (vs an average exchange
rate YTD of 1.31) and is growing to reach 1.39 in 2015.
20 April 2012 15
F173904
EADS
25 1.5
1.4
20
1.3
15
1.2
($bn)
1.1
10
1.0
5
0.9
0 0.8
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016+
Hedge v olume (lhs) Av g. Achiev ed hedge rate /$ (rhs) Av g. spot rate /$ (rhs)
We therefore expect no major impact to EBIT, from 2012 and beyond, after a 200m negative
impact in 2011 due to the deterioration of hedging rates (from /$1.36 to 1.37).
The dollars weakness vs the euro since the early 2000s has been a major motivation for EADS
to focus on its cost base, and since 2003 EADS has introduced several cost-cutting
programmes in order to retain its competitiveness against Boeing in the commercial aviation
market. We summarise the various cost-cutting programmes in the following table.
EADS management has done a commendable job in keeping the group competitive through a
number of cost-cutting programmes. Although the initial programme, Route 06, failed to
achieve the targeted 1.5bn in savings (we believe that there was perhaps a 500m shortfall)
the subsequent plans, particularly Power8, have been very successful. The latest plans,
Shape, at Eurocopter; Agile, at Astrium; and the transformation programme at Cassidian are
currently under way with the promise of significant benefits to come in the medium term.
20 April 2012 16
F173904
EADS
16,000 1,800
14,000 1,600
1,400
12,000
1,200
10,000
1,000
8,000
800
6,000
600
4,000
400
2,000 200
- -
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011* 2012e 2013e 2014e
Source: Company, SG Cross Asset Research; *2011: Net cash before acquisitions
As we can see from the chart above, the groups net cash balance increase shows a good
correlation with the order intake at Airbus, as customers tend to put a down payment with
their orders. However, in 2008 and 2009, although Airbuss order intake fell sharply from the
very high levels of earlier years, the net cash balances have continued to improve.
It is noteworthy that the groups customer advances comprise both the civil business of
Airbus as well as the military businesses, which also enjoy high levels of working capital
support from their customers. We show the group inventory and customer advances trend in
the following table:
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
2004 2005 2006 2007 2008 2009 2010 2011
Source: Company
20 April 2012 17
F173904
EADS
A constant question raised by investors is the potential financing shortfall for the Airbus
business since airline profitability has been coming under intense pressure.
Investors wonder whether this funding shortfall will lead to Boeing and Airbus having to cut
their production plans or, more worryingly, provide large amounts of vendor financing. This
section provides a detailed primer on aircraft financing. Our overall conclusion is that there
should not be any funding shortfall in the medium term, and production schedules are firm.
EBIT margin ranked by sectors (average 1991-2011, %) Capex/sales ranked by sectors (average 1991-2011, %)
30.0 18.0
16.0
25.0
14.0
20.0 12.0
10.0
15.0
8.0
10.0 6.0
4.0
5.0
2.0
0.0 0.0
Healthcare
Healthcare
Utilities
Utilities
Food & bev .
Retail
Chemicals
Chemicals
HPC
HPC
Oil & Gas
Airlines
Airlines
Telecoms
Telecoms
Mining
Technology
Technology
Source: Worldscope, SG Cross Asset Research Source: Worldscope, SG Cross Asset Research
The graphs above show EBIT margin and capital expenditure as a percentage of sales among
different industries. The airline industrys EBIT margin average over the 1991-2011 period was
one of the weakest in our sample. Moreover, it is highly volatile as it is strongly correlated with
economic fluctuations. Airlines often fail to generate sufficient cash flow to invest in such
expensive aircraft: conversely, their capital expenditures are one of the highest among the
same industry panel, with an average of c.12% of sales over the 1991-2011 period. Third-
party aircraft financings role is to help airlines renew their fleet when their own balance sheet
does not enable it.
As a consequence, airlines were keen to retain their cash for survival through these bad times
and postponed aircraft orders. Boeing and Airbus orders fell from a record 2,883 units in 2007
to as low as 573 units in 2009, as the banking crisis and the subsequent economic recession
in western countries threatened the survival of many airlines.
20 April 2012 18
F173904
EADS
Industry net profit and Airbus & Boeing gross orders Industry interest cover and Airbus & Boeing gross orders
0 0 2.0 1000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
-10 -1000 0.0 0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
-20 -2000 -2.0 -1000
Source: Worldscope, SG Cross Asset Research Source: Worldscope, SG Cross Asset Research
On the other hand, orders tend to grow strongly when the airline industry reports good profits
and is more capable of paying off debt, as seen in 2007 and 2011. Gross orders grew by
1,009 units between 2006 and 2007 and by 1,277 units between 2010 and 2011.
Aircraft financing acts as a buffer for aircraft manufacturers in times of economic crisis, as it
limits the negative impact on their orders.
110,000
100,000
90,000
80,000
70,000
60,000
50,000
40,000
30,000
20,000
10,000
-
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012e 2013e 2014e
Boeing commercial aircraf t Airbus commercial* Embraer commercial av iation Bombardier aero
Source: Company, SG Cross Asset Research; *Calculated with 2011 exchange rate
The total aircraft financing requirement rose steadily from 2003 to 2007, when it reached
$81bn. The banking crisis put a halt to this, and the market contracted to $70bn in 2010,
before recovering to its previous trend. We estimate that around $90bn will be required in
2012e, and the strong growth in commercial aviation should drive the market to more than
$100bn in 2014e.
20 April 2012 19
F173904
EADS
2009 World fleet (21,500 commercial aircraft) 2030e World fleet (46,100 commercial aircraft)
Regional Regional
15% 15%
747 and
747 and larger
larger 3%
6%
Single aisle
Single aisle 57%
61%
Twin aisle Twin aisle
18% 25%
600 600
500 500
400 400
300 300
200 200
100 100
0 0
2012e
2014e
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012e
2014e
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
Given the high capital costs, large commercial aircraft are rarely paid for with cash: the failure
to generate consistent profits and balance sheet weakness make this difficult for the airlines.
The relevance of direct airline financing has decreased considerably. The role of third parties
is therefore essential, allowing other forms of financing. Among others, they include bank
loans, capital markets debt, leases and manufacturer support.
20 April 2012 20
F173904
EADS
Low-risk (strong balance sheet) and high risk (weak balance sheet) airlines do not have the
same access to the different forms of financing, as illustrated in the chart below:
Cash
Manufacturers
Primary Secondary
source source
These different forms of financing carry with them varying costs, with cash being the cheapest
while any support from the aircraft manufacturers is very expensive manufacturers are
typically seen as a last resort for financing.
Airlines with sound balance sheets use their cash resources to buy aircraft whereas their
poorer cousins usually go the leasing route to secure aircraft. Some of the strong airlines
also use a small number of leased aircraft on short leases as a means of managing demand
fluctuations.
Cash
Cash is the cheapest way to finance an aircraft. It is however only available to a few profitable
airlines and could be risky compared to a lease, as the airlines tend to adjust their fleet in
down cycles by terminating a lease contract, which is much easier than selling an aircraft at a
good price in a difficult market.
20 April 2012 21
F173904
EADS
Other 1%
Americas 11%
Asia 5%
Europe 83%
RBS has recently exited the market as part of its exercise in deleveraging its balance sheet
but, interestingly, the RBS assets attracted a great deal of interest with Sumitomo (via
Sumitomo Mitsui Financial Group and Sumitomo Corp.) triumphing over a number of other
interested parties, and paying a premium to the book value of the assets.
EETC structure
Airline
Subordination
agent
Principal and interests distribution
Pass through trustee for Pass through trustee for Pass through trustee for
class A trust class B trust class C trust
20 April 2012 22
F173904
EADS
Securing the EETCs by aircraft as collateral has several positive aspects: aircraft have
historically retained their value (they depreciate in value over time in ways that have been
relatively predictable); they are liquid and mobile assets (they can be sold on the secondary
market and are easy to relocate). Moreover, aircraft have protection under chapter 11: aircraft
financing entities have the assurance that if the airline does not meet its obligations, they can
obtain possession of their collateral within a short period of time.
Leasing
Different forms of leases
Aircraft can be leased for a fixed term. The lessee is required to make fixed or floating
payments, with floating leases being adjusted periodically based on LIBOR fluctuations. At the
end of the lease term, the lessee can either extend the lease or return the aircraft. If the lessee
terminates early, termination penalties are applied (typically, they are equal to the remaining
lease payments due plus any loss incurred by the lessor in remarketing the leased aircraft).
To keep things simple, a lease is either an operating or a finance one. According to IFRS
standards, five criteria are used to determine how to classify a lease. They are summed up
below:
1 2 3 4 5
Finance Operating
lease lease
In an operating lease, the lessor transfers only the right to use the aircraft to the lessee. At the
end of the period, the lessee returns the aircraft property to the lessor. Therefore, the lessee
does not assume the risk of ownership, and the lease expense is recorded as an operating
expense on the income statement, and the lease does not affect the balance sheet.
20 April 2012 23
F173904
EADS
P&L Lease income should be recognised over the The lessor should recognise finance income
lease term on a straight-line basis. based on a pattern reflecting a constant periodic
rate of return.
Manufacturer P&L Manufacturers or dealer lessors should include selling profit or loss in the same period as they would
for an outright sale.
Source: IAS, SG Cross Asset Research
In a finance lease, the lessee assumes some of the risks and benefits of ownership. The lease
is therefore recognised as both an asset and a liability on the balance sheet. The present value
of the lease payments is treated as debt, and interest expenses are recorded on the income
statement. The company also has to record depreciation on the asset and deduct the interest
expenses of the lease payment.
Lenders
(optional)
ECAs
Hermes Lease
Loan 85%
Guarantee Banks SPC* Airline
PAA* and
ECGD manufacturer
consent
Ex-Im Bank
Title to the aircraft Payment
Pre-delivery
payments, c.15%
Manufacturer
Source: SG Cross Asset Research, adapted from EADS; *PAA: Purchase Agreement Assignment. *SPC: Special Purpose Company
20 April 2012 24
F173904
EADS
The preceding chart explains the architecture of a deal involving ECAs. The ECAs of the
United-States (Ex-Im Bank), France (Coface), Germany (Hermes) and the United Kingdom
(ECGD) issue guarantees that support bank loans in order to finance the exports of Airbus and
Boeing (and other exporting companies). The banks are subsequently more inclined to provide
financing to the airlines. ECAs play a major role in aircraft financing usually in down cycles as
they are supposed to take over the role of other players who are more reluctant to lend
capital.
Coface France n/a n/a Privatised in 1994, Coface is now 100% owned by Natixis. In addition to its private sector activities,
Coface manages guarantees intended to support French exports, on behalf of the French State.
Hermes Germany 107.5bn 120bn Euler Hermes Deutschland and PriceWaterhouseCoopers Aktiengesellschaft
(2010) (2010) Wirtschaftsprfungsgesellschaft manage the official export credit guarantee scheme on behalf of the
Federal Government. Euler Hermes acts as leading partner in this consortium.
ECGD UK 16.1bn n/a ECGD was created in 1919 and was the worlds first Export Credit Agency.
(2010-11)
Ex-Im Bank US $89.2bn $100bn Senate Democrats proposed to increase the exposure limit to $140bn, but the measure still faces
(2011) (2011) opposition from some House Republicans.
Ex-Im bank has $89bn in commitments, coming close to its $100bn cap running through May
2012. US authorities are currently trying to extend that cap to $140bn, which could give Ex-Im
Bank more room for its export financing.
ECAs are essential to the aeronautics business, as it represents a major part of their exposure:
from 62% for the British ECGD to 23% for the German Hermes, as shown in the graph below.
100%
80% 38
53
61
60% 77
40%
62
47
20% 39
23
0%
ECGD Ex-Im Bank Cof ace Hermes
Aeronautics Others
Although it does not include only Airbus and Boeing, we can easily estimate that a major part
of the ECAs financing goes to these two companies. In fact, ECGD disclosed that 61% of its
export credits went to Airbus alone in 2010.
20 April 2012 25
F173904
EADS
6 8
7
5
6
4
5
3 4
3
2
2
1
1
0 0 Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Jan-99
Jan-00
Jan-01
Jan-02
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
LIBOR 1 week LIBOR 6 months LIBOR 12 months LIBOR 1 week LIBOR 6 months LIBOR 12 months
Moreover, upfront rates on loans went from 4.0-7.5% under the 2007 ASU (Aircraft Sector
Understanding) for large aircraft to 7.7214.74% in 2011. The ASU is an interstate agreement
that regulates the ECAs activities. The rules on ECA pricing are highlighted in the table below.
Despite this rate increase, ECA deals remain cheaper and more accessible than standard
bank loans. Moreover, the strategic and economic importance of exports make us believe that
ECAs will continue to provide easy financing to Airbus and Boeings clients, even if the
Eurozone crisis intensifies. Ex-Im bank, which has $89bn in commitments coming close to
its $100bn cap running through May 2012 should see its ceiling extended to $140bn in the
current year.
20 April 2012 26
F173904
EADS
Therefore, they do help ease the loan shortage by stepping in to replace other players.
However, this type of financing is limited in amount and time; Airbus and Boeing only financed
3% and 1% of the aircraft delivered in 2009, respectively.
3 6
2 4
1 2
0 0
(bn)
(%)
-1 -2
-2 -4
-3 -6
-4 -8
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Although residual value guarantees are not commonly used by Boeing, Airbus uses them more
extensively. The table below shows the trend of RVGs provided by Airbus and Boeing
20 April 2012 27
F173904
EADS
Manufacturers disclose limited information concerning the RVGs they issue, but they are
almost negligible on Boeings side, as the maximum potential payments amounted to only
$29m in 2011. The figures gathered above concern the whole of EADS (including Airbus,
Eurocopter and the 50% share in ATR; EADS does not issue RVGs for other divisions) and
show that RVGs are used more commonly. The trend during the 2008-2009 crisis shows that
the nominal value of RVGs issued rose a little, to 1.5bn, although we do not know the
number of aircraft guaranteed.
20 April 2012 28
F173904
EADS
Other
11%
Japan
6%
Europe
44%
China
23%
US
16%
Source: EADS
As an example, Sumitomo in early 2012 won an auction to buy RBS Aviation Capital for
$7.3bn. Four companies participated in the auction, highlighting banks keen interest in these
activities. The transaction netted a good price, as RBSs business was paid 1.04 times its
book value in the biggest ever deal for an aviation leasing company. Following this deal,
Sumitomo is expected to become the worlds fourth-biggest aviation leasing company.
Share of the worlds total fleet, 1970 Share of the worlds total fleet, 2010 Share of the worlds total fleet, 2015F
Leased
Leased Leased
0.5%
35.7% 50%
Owned Owned
Owned 64.3% 50%
99.5%
20 April 2012 29
F173904
EADS
We show the major global leasing companies in the graph, below. GECAS and ILFC dominate
the market, with a combined fleet value of $65bn. Way behind, with a fleet value of $8.4bn, is
AerCap, following its acquisition of Genesis Leasing. The Australian Macquarie AirFinance
made its entry into the top 10 with its acquisition of 53 aircraft from ILFC.
40.0
35.0 33.4
31.5
30.0
25.0
20.0
15.0
0.0
GECAS ILFC AerCap CIT Group RBS BBAM BOC Av iation AWAS Macquarie
Av iation Av iation Capital Air
Capital Group Finance
100
80
60
40
20
0
Luf thansa Delta Ry anAir Easy Jet JetBlue American Air China Air France Cathay Emirates
Airlines - KLM Pacif ic
Even though no trend can be established between low-cost carriers (LCCs) and established
airlines RyanAir and EasyJet own 70% and 63% of their fleet, respectively operating
leases seem to be preferred for their increased flexibility.
20 April 2012 30
F173904
EADS
Variable costs
26%
Fixed costs
Variable costs 49%
51%
Fixed costs
74%
Source: Boeing, from DOT form 41 Source: Boeing, from DOT form 41
Fixed costs represented 74% of airlines costs in 1998, therefore preventing them from
reducing expenditures by cutting back operations or by reducing capacity in economic down
cycles. Airlines started outsourcing their operating infrastructure, lifting variable costs to a
51% share in 2010.
20 April 2012 31
F173904
EADS
Global RPK and ASK growth (%) Airline industry EBIT and EBIT margin trend
50 25 5
40 20 4
30
15 3
20 ($bn)
(%)
10 2
10
5 1
0
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
0 0
-10
2003
2004
2005
2006
2007
2008
2009
2010
2011F
2012F
-20 -5 -1
-30
EBIT (lhs, CS*) EBIT (lhs, BCS*)
RPK growth FTK growth
EBIT margin (rhs, CS*) EBIT margin (rhs, BCS*)
Source: IATA, SG Cross Asset Research Source: IATA, *CS: Central Scenario; BCS: Banking Crisis Scenario
The airlines EBIT fell from $19.9bn in 2007 to -$1.1bn and $1.9bn in 2008 and 2009,
respectively. IATA, which collects the data and provides estimates, do not see such a strong
decline in 2011 and 2012 in their central scenario, as shown in the chart above, right-hand
side. However, in their banking crisis scenario, they estimate that airlines EBIT could fall as
low as -$3.1bn should the current crisis deteriorate drastically.
Financed Financed
1% 4%
Cash /
external* Cash /
ECAs external*
46% 15% 49%
ECAs
34%
Leasing
23%
Sale & Sale &
leaseback leaseback Leasing
15% 4% 9%
Source: EADS, *includes commercial debt Source: EADS, *includes commercial debt
We did not, however, witness any funding gap during this period, as airlines were able to find
other sources of financing: Airbus grew its share from 1% to 4% between 2007 and 2009, and
most importantly, ECAs were responsible for most of the funding changes, with their share
rising from 15% in 2007 to 34% in 2009.
20 April 2012 32
F173904
EADS
The trend was similar at Boeing, with shrinking bank debt and leasing, whereas ECAs
cash/equity filled the gap. A similar situation could be imagined today, in case of a
deterioration of the current banking/Euro crisis.
The following chart shows the trend in ECA guarantees during the precedent trough:
100
80
60
40
20
0
2003 2004 2005 2006 2007 2008 2009 2010
Source: Companies, SG Cross Asset Research; *Calculated using 2010 exchange rate
The amount of guarantees issued by the four major Western ECAs rose dramatically in 2009,
from $61bn to $85bn. Although this amount was not solely intended for Airbus and Boeing
customers, a large part of it was for airlines. The rise continued in 2010, with a record amount
of $100bn. We believe that US officials are likely to raise the Ex-Im Bank ceiling, considering
the strategic nature of its activities, and that ECAs will continue to provide the necessary
financing.
20 April 2012 33
F173904
EADS
Addendum
Income statement
EADS P&L highlights
Y/E Dec. (m) 2009 2010 2011 2012e 2013e 2014e
Total sales 42,822 45,752 49,128 52,401 54,955 57,279
Cost of sales -38,383 -39,528 -42,285 -45,065 -47,261 -49,260
EBITDA (excl. associates) 1,370 2,668 3,388 4,430 5,278 6,150
Operating profit reported -322 1,231 1,696 2,580 3,428 4,300
Exceptionals (FV adj.) -64 -44 -83 -42 -42 -42
Net R&D capitalisation -20 -50 -55 -450 -430 -300
Net interest -147 -99 13 -120 -100 -80
Pre-tax profit (SG adjusted) -533 1,088 1,571 1,968 2,856 3,878
Extraordinaries, others -445 -272 -233 -300 -300 -300
Pre-tax profit reported -978 816 1,393 2,118 2,986 3,878
Underlying tax charge 159 -326 -471 -590 -857 -1,163
Reported tax charge 220 -244 -356 -635 -896 -1,163
Minorities -11 -19 -4 -10 -10 -10
Reported PAT -769 553 1,033 1,473 2,080 2,705
SG Adjusted PAT -385 743 1,096 1,368 1,989 2,705
Fully diluted shares in issue (m) 810 811 813 813 813 813
EPS published () -0.95 0.68 1.27 1.81 2.56 3.33
EPS (SG Adjusted) () -0.48 0.92 1.35 1.68 2.45 3.33
DPS () 0.00 0.22 0.45 0.60 0.75 0.90
Source: Company, SG Cross Asset Research
Sales
Airbus 28,067 29,978 33,103 35,089 37,195 39,054
Eurocopter 4,570 4,830 5,415 5,848 6,082 6,325
Astrium 4,799 5,003 4,964 5,563 5,730 5,902
Cassidian 5,363 5,933 5,803 5,861 5,920 5,979
Other businesses 1,096 1,182 1,252 1,290 1,328 1,368
Eliminations-holding -1,073 -1,174 -1,409 -1,250 -1,300 -1,350
Total 42,822 45,752 49,128 52,401 54,955 57,279
Operating profit
Airbus -1,371 305 584 1,300 2,000 2,800
Eurocopter 263 183 259 390 440 460
Astrium 261 283 267 320 360 370
Cassidian 449 457 331 350 410 450
Other businesses 21 25 59 60 68 70
Eliminations-holding 55 -22 196 160 150 150
Total -322 1,231 1,696 2,580 3,428 4,300
20 April 2012 34
F173904
EADS
Vector Aerospace 2011 454 396 47 1.15 9.6 Aviation support and services
Jena-Optronik, Regency IT Consulting, Trig-Tek 2010 n/a n/a n/a n/a n/a Space sensors and optical systems, cyber security,
dynamic test and measurement instruments
80% of Euroheli, Surrey Satellite Technology 2009 n/a n/a n/a n/a n/a Helicopter distributor, small satellites and subsystems
Public
49%
SEPI
6%
Source: Company
20 April 2012 35
F173904
EADS
APPENDIX
20 April 2012 36
F173904
EADS
COMPANIES MENTIONED
BAE Systems (BAES.L, Hold)
Boeing (BA.N, Sell)
Bombardier (BBDb.TO, Hold)
EADS (EAD.PA, Buy)
EasyJet (EZJ.L, No Reco)
Euler Hermes (ELER.PA, Hold)
Finmeccanica (SIFI.MI, Sell)
Meggitt (MGGT.L, Hold)
MTU (MTXGn.DE, Sell)
Natixis (CNAT.PA, Buy)
Rolls-Royce (RR.L, Sell)
Royal Bank of Scotland (RBS.L, Buy)
Ryanair (RYA.L, No Reco)
Safran (SAF.PA, Hold)
SUMITOMO (8053.T, No Reco )
Zodiac Aerospace (ZODC.PA, Sell)
ANALYST CERTIFICATION
The following named research analyst(s) hereby certifies or certify that (i) the views expressed in the research report accurately reflect his or
her or their personal views about any and all of the subject securities or issuers and (ii) no part of his or her or their compensation was, is, or
will be related, directly or indirectly, to the specific recommendations or views expressed in this report: Zafar Khan
Historical Price: EADS(EURO AERO DEF (EAD.PA) 2009/2010 Change 2011/2012 Change
24
19
14
9
04/09 07/09 10/09 01/10 04/10 07/10 10/10 01/11 04/11 07/11 10/11 01/12
20 April 2012 37
F173904
EADS
250
BUY: absolute total shareholder return forecast of 15% or more 43%
Updated on 02/04/12
41%
over a 12 month period.
200
HOLD: absolute total shareholder return forecast between 0%
and +15% over a 12 month period.
150
SELL: absolute total shareholder return forecast below 0% over a
12 month period. 51%
45%
100 16%
20 April 2012 38
F173904
EADS
MSCI DISCLAIMER: The MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc. (MSCI). Without
prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, redisseminated or
used to create any financial products, including any indices. This information is provided on an as is basis. The user assumes the entire
risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the
information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular
purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any
third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI, Morgan
Stanley Capital International and the MSCI indexes are service marks of MSCI and its affiliates or such similar language as may be
provided by or approved in advance by MSCI.
IMPORTANT DISCLOSURES
Boeing SG acted as co-manager in Boeing Capital Corporation's senior high grade bond issue.
Bombardier SG acted as co-manager in Bombardier's high grade bond issue
EADS SG is mandated lead arranger of the loan granted to Republic of Brazil to finance the acquisition of helicopters from
EADS Group.
Finmeccanica SG makes a market in Finmeccanica warrants
Safran SG acted as financial advisor to Safran in the acquisition of L1 Identity Solutions
SG and its affiliates beneficially own 1% or more of any class of common equity of Safran.
SG or its affiliates act as market maker or liquidity provider in the equities securities of EADS, Finmeccanica, Natixis.
SG or its affiliates expect to receive or intend to seek compensation for investment banking services in the next 3 months from BAE Systems,
Bombardier, EADS, Euler Hermes, Finmeccanica, Royal Bank of Scotland, Safran.
SG or its affiliates had an investment banking client relationship during the past 12 months with Boeing, Bombardier, Safran.
SG or its affiliates have received compensation for investment banking services in the past 12 months from Boeing, Bombardier, Safran.
SG or its affiliates managed or co-managed in the past 12 months a public offering of securities of Boeing, Bombardier.
SGAS had a non-investment banking non-securities services client relationship during the past 12 months with Boeing, Bombardier, Royal
Bank of Scotland, Safran, Zodiac Aerospace.
SGAS had a non-investment banking securities-related services client relationship during the past 12 months with Royal Bank of Scotland.
SGAS received compensation for products and services other than investment banking services in the past 12 months from Boeing,
Bombardier, Royal Bank of Scotland, Safran, Zodiac Aerospace.
SGCIB received compensation for products and services other than investment banking services in the past 12 months from BAE Systems,
Bombardier, EADS, EasyJet, Finmeccanica, MTU, Rolls-Royce, Royal Bank of Scotland, Ryanair, Safran, Zodiac Aerospace.
The analyst(s) responsible for preparing this report receive compensation that is based on various factors including SGs total revenues, a
portion of which are generated by investment banking activities.
Non-U.S. Analyst Disclosure: The name(s) of any non-U.S. analysts who contributed to this report and their SG legal entity are listed below.
U.S. analysts are employed by SG Americas Securities LLC. The non-U.S. analysts are not registered/qualified with FINRA, may not be
associated persons of SGAS and may not be subject to the FINRA restrictions on communications with a subject company, public
appearances and trading securities held in the research analyst(s) account(s): Zafar Khan Socit Gnrale London
20 April 2012 39
F173904
EADS
IMPORTANT DISCLAIMER: The information herein is not intended to be an offer to buy or sell, or a solicitation of an offer to buy or sell, any
securities and has been obtained from, or is based upon, sources believed to be reliable but is not guaranteed as to accuracy or
completeness. Material contained in this report satisfies the regulatory provisions concerning independent investment research as defined in
MiFID. SG does, from time to time, deal, trade in, profit from, hold, act as market-makers or advisers, brokers or bankers in relation to the
securities, or derivatives thereof, of persons, firms or entities mentioned in this document and may be represented on the board of such
persons, firms or entities. SG does, from time to time, act as a principal trader in equities or debt securities that may be referred to in this
report and may hold equity or debt securities positions. Employees of SG, or individuals connected to them, may from time to time have a
position in or hold any of the investments or related investments mentioned in this document. SG is under no obligation to disclose or take
account of this document when advising or dealing with or on behalf of customers. The views of SG reflected in this document may change
without notice. In addition, SG may issue other reports that are inconsistent with, and reach different conclusions from, the information
presented in this report and is under no obligation to ensure that such other reports are brought to the attention of any recipient of this report.
To the maximum extent possible at law, SG does not accept any liability whatsoever arising from the use of the material or information
contained herein. This research document is not intended for use by or targeted to retail customers. Should a retail customer obtain a copy of
this report he/she should not base his/her investment decisions solely on the basis of this document and must seek independent financial
advice.
The financial instrument discussed in this report may not be suitable for all investors and investors must make their own informed decisions
and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.
The value of securities and financial instruments is subject to currency exchange rate fluctuation that may have a positive or negative effect on
the price of such securities or financial instruments, and investors in securities such as ADRs effectively assume this risk. SG does not provide
any tax advice. Past performance is not necessarily a guide to future performance. Estimates of future performance are based on
assumptions that may not be realized. Investments in general, and derivatives in particular, involve numerous risks, including, among others,
market, counterparty default and liquidity risk. Trading in options involves additional risks and is not suitable for all investors. An option may
become worthless by its expiration date, as it is a depreciating asset. Option ownership could result in significant loss or gain, especially for
options of unhedged positions. Prior to buying or selling an option, investors must review the "Characteristics and Risks of Standardized
Options" at http://www.optionsclearing.com/publications/risks/riskchap.1.jsp.
Notice to French Investors: This publication is issued in France by or through Socit Gnrale ("SG") which is authorised and supervised
by the Autorit de Contrle Prudentiel and regulated by the Autorite des Marches Financiers.
Notice to U.K. Investors: This publication is issued in the United Kingdom by or through Socit Gnrale ("SG"), London Branch . Socit
Gnrale is a French credit institution (bank) authorised and supervised by the Autorit de Contrle Prudentiel (the French Prudential Control
Authority). Socit Gnrale is subject to limited regulation by the Financial Services Authority (FSA) in the U.K. Details of the extent of SG's
regulation by the FSA are available from SG on request. The information and any advice contained herein is directed only at, and made
available only to, professional clients and eligible counterparties (as defined in the FSA rules) and should not be relied upon by any other
person or party.
Notice to Polish Investors: this document has been issued in Poland by Societe Generale S.A. Oddzial w Polsce (the Branch) with its
registered office in Warsaw (Poland) at 111 Marszakowska St. The Branch is supervised by the Polish Financial Supervision Authority and the
French Autorit de Contrle Prudentiel. This report is addressed to financial institutions only, as defined in the Act on trading in financial
instruments. The Branch certifies that this document has been elaborated with due dilligence and care.
Notice to U.S. Investors: For purposes of SEC Rule 15a-6, SG Americas Securities LLC (SGAS) takes responsibility for this research report.
This report is intended for institutional investors only. Any U.S. person wishing to discuss this report or effect transactions in any security
discussed herein should do so with or through SGAS, a broker-dealer registered with the SEC and a member of FINRA, with its registered
address at 1221 Avenue of the Americas, New York, NY 10020. (212)-278-6000.
Notice to Canadian Investors: This document is for information purposes only and is intended for use by Permitted Clients, as defined under
National Instrument 31-103, Accredited Investors, as defined under National Instrument 45-106, Accredited Counterparties as defined under
the Derivatives Act (Qubec) and "Qualified Parties" as defined under the ASC, BCSC, SFSC and NBSC Orders
Notice to Singapore Investors: This document is provided in Singapore by or through Socit Gnrale ("SG"), Singapore Branch and is
provided only to accredited investors, expert investors and institutional investors, as defined in Section 4A of the Securities and Futures Act,
Cap. 289. Recipients of this document are to contact Socit Gnrale, Singapore Branch in respect of any matters arising from, or in
connection with, the document. If you are an accredited investor or expert investor, please be informed that in SG's dealings with you, SG is
relying on the following exemptions to the Financial Advisers Act, Cap. 110 (FAA): (1) the exemption in Regulation 33 of the Financial
Advisers Regulations (FAR), which exempts SG from complying with Section 25 of the FAA on disclosure of product information to clients;
(2) the exemption set out in Regulation 34 of the FAR, which exempts SG from complying with Section 27 of the FAA on recommendations;
and (3) the exemption set out in Regulation 35 of the FAR, which exempts SG from complying with Section 36 of the FAA on disclosure of
certain interests in securities.
Notice to Hong Kong Investors: This report is distributed in Hong Kong by Socit Gnrale, Hong Kong Branch which is licensed by the
Securities and Futures Commission of Hong Kong under the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
("SFO"). This document does not constitute a solicitation or an offer of securities or an invitation to the public within the meaning of the SFO.
This report is to be circulated only to "professional investors" as defined in the SFO.
Notice to Japanese Investors: This publication is distributed in Japan by Societe Generale Securities (North Pacific) Ltd., Tokyo Branch,
which is regulated by the Financial Services Agency of Japan. This document is intended only for the Specified Investors, as defined by the
Financial Instruments and Exchange Law in Japan and only for those people to whom it is sent directly by Societe Generale Securities (North
Pacific) Ltd., Tokyo Branch, and under no circumstances should it be forwarded to any third party. The products mentioned in this report may
not be eligible for sale in Japan and they may not be suitable for all types of investors.
Notice to Australian Investors: This document is issued in Australia by Socit Gnrale (ABN 71 092 516 286) ("SG"). SG is regulated by
APRA and ASIC and holds an AFSL no. 236651 issued under the Corporations Act 2001 (Cth) ("Act"). The information contained in this
document is only directed to recipients who are wholesale clients as defined under the Act.
http://www.sgcib.com. Copyright: The Socit Gnrale Group 2012. All rights reserved.
This publication may not be reproduced or redistributed in whole in part without the prior consent of SG or its affiliates.
20 April 2012 40
F173904