CTT Systems - Passing the trough

54% organic sales decline, EBIT stays above break-even Minor estimate changes ’22e-’23e, AM to drive recovery 15x EBIT ’23e, 10% LT EBIT CAGR, 40% ROCE Aftermarket rebound continues CTT saw a 50% organic sales decline for the fourth consecutive quarter, as a result of lowered OEM production rates and low flight utilisation. However, the company managed to stay profitable. Looking ahead, the CEO believes that the trough has been passed, and guided for a sequential improvement in Q2’21 (sales of SEK 35m-40m vs. SEK 31m in Q1’21).

With the 787 fleets’ flight hours currently at c. 60% of pre-COVID levels, we argue that the vaccine rollout and return in leisure travel will be the primary drivers behind a continued rebound (the outlook for business travel remains uncertain). Finally, we note that the CEO reiterated his optimism for CTT’s potential within the private jet segment.

In our view, CTT looks well-positioned to deliver systems to both Airbus and Bombardier (c. 40-70 aircraft per year of a total 100 aircraft market, where CTT estimates an annual sales market value of SEK 200m). Expect y-o-y growth to return in Q3’21 We lower our ’21e EBIT estimate by SEK 5m (-9%) due to a slightly slower OEM recovery and margin profile.

However, our ’22e-’23e estimates are essentially unchanged. We expect Q3’21 to mark the first quarter with y-o-y sales growth. This, in combination with a high share of aftermarket sales, is set to drive a return to 30% margins during H2’21e.

We expect CTT to deliver a ~70% adj. EBIT CAGR ’20-’23e, and for 2023e earnings to be ~30% above 2019 levels. OEM return will take time, but AM will drive earnings growth Although we expect continued negative sentiment from certain parts of the world, we note that both the Chinese and US air travel markets have recovered strongly.

The US is especially good for CTT (the B787/A350 fleet is used for domestic routes in the US). In the long term, we argue that CTT has the potential to deliver a 6-9%.