Saturday 18 November 2017

Share watch: Leonardo turns a corner - but is only for the brave

Leonardo’s €12bn business is focused on helicopters, aircraft, space, defence, naval and security systems. Stock photo
Leonardo’s €12bn business is focused on helicopters, aircraft, space, defence, naval and security systems. Stock photo

John Lynch

The great Renaissance genius Leonardo da Vinci is remembered as a gentle soul. Friends recalled seeing the illustrious artist buy caged birds in the Florentine marketplace and set them free so that he could study their flapping wings in flight. I always thought it was a bit of a libel on the great man to name one of the Teenage Mutant Ninja Turtles after him.

But worse was to come. In the past year or so, the partly state-owned Italian defence contractor (and one of the top 10 arms traders in the world) was renamed after the brilliant vegetarian.

While it is also true that Leonardo worked for some dodgy characters in his time and designed many weapons of war (he is credited with designing the first machine gun), I think I'd prefer if he was remembered for the 'Mona Lisa' and other things of great beauty. Nevertheless, Leonardo has taken its place alongside well-known names in war like Boeing, Lockheed Martin, Raythenon, United Technologies and General Dynamics.

Up to the beginning of 2016 the company was known as Finmeccanica. It is listed on the Milan Stock Exchange, with 47,000 employees, 150 sites worldwide and is valued at €8.5bn.

The origins of the company go back to the end of World War II. Then Italian industry was in a critical condition with most of its manufacturing base destroyed. The government, through its industrial policy arm, Institute for Industrial Reconstruction, set up Finmeccanica to manage what was left of the engineering and shipbuilding industry. Over the years, as Italian politics pursued its unpredictable course, the company found itself being used as a political football and a regular feature on the financial front pages.

However, in 1993 it was floated off.

Post-floatation Finmeccanica continued to have periodic sensational splashes on the front pages with a helicopter merger controversy in the UK, the controversial selling of equipment to the Assad government during the Syrian uprising, and recently it lost two CEOs, one for bribery and the second had his reputation tarnished, being blamed for a tragic rail disaster while he headed a State railway company.

Leonardo's €12bn business is focused on helicopters, aircraft, space, defence, naval and security systems. The helicopter business Augusta Westland is involved in both commercial and military markets and accounts for one-third of total sales.

Its aeronautics division is involved in making fighter jets and commercial aircraft. It has a joint venture to build a European supersonic fighter jet.

Separately, it produces regional turbo prop commercial aircraft and makes fuselages for Boeing. This division accounts for a quarter of group sales.

Leonardo's defence, naval and security systems contribute 40pc to group sales. Its security business includes the design and management of IT and data processing for the intelligent services including cyber security. Given recent events, this is a vital business.

The company is involved in naval security, naval artillery, armoured vehicles and underwater vessels and produces missiles and missile systems.

The group's involvement in space exploration is focused on space systems, the management of space launches and orbiting satellites for telecoms, meteorology, and defence.

Revenue last year was €12bn, its lowest in the last 10 years, but operating profit, at €1.2bn, was the highest in the same period. Its restructuring programme is bearing fruit with net profit of €507m in 2016 compared to €20m two years earlier.

Net borrowings declined in the last two years but are still high at €2.8bn. The shares trade at €14, up from a yearly low of €8.

Leonardo investors are a long-suffering group and only this year did it pay its first tiny dividend since 2010. Leonardo operates in a volatile market which is affected by political, social and economic conditions.

The holding being owned by the Italian government is yet another cause for concern. Ethical reasons aside, this share is only for the courageous.

Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.

Irish Independent

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