Shares of MTU Aero Engines, a prominent German aircraft-engine manufacturer, experienced another decline on Tuesday following an announcement that it expects a significant financial blow this year. Pratt & Whitney’s parent company, RTX, revealed plans to recall hundreds of jet engines, resulting in an estimated impact of approximately €1 billion ($1.07 billion).
As of 1000 GMT, MTU Aero shares were trading 4.5% lower at €174.45. The substantial drop in share value commenced during Monday afternoon trading after the company publicly disclosed the projected consequences of the recall.
RTX, formerly recognized as Raytheon Technologies, declared on Monday that it would conduct inspections on roughly 600 to 700 Pratt engines over the course of the next three years. This decision was motivated by a pre-existing issue concerning the powdered metal utilized in manufacturing specific engine components. MTU Aero Engines supplies critical elements for Pratt’s geared-turbofan engines, which power renowned aircraft such as Airbus’s A320neo.
MTU Aero Engines stated that the recall would adversely affect its revenue and earnings before interest and taxes for the current year. However, the majority of the liquidity impact is anticipated to occur between 2024 and 2026. Notably, the company provides adjusted EBIT guidance rather than reported, emphasizing its commitment to transparency. Once it fully evaluates the impact of the recall, MTU Aero Engines will present a stable forecast for the year.
In response to these challenges, the company asserted its determination to mitigate the aforementioned effects as much as possible by implementing appropriate measures.
Stay tuned for further updates.
Financial Outlook for 2023
The company has set ambitious financial targets for 2023. They are aiming for revenue between EUR6.1 billion and EUR6.3 billion, with adjusted EBIT slightly higher than EUR800 million. The company also expects a slight increase in margin compared to the previous year. Additionally, they anticipate free cash flow to be slightly higher than the EUR326 million recorded last year.
To provide an update on the issue, the group will be hosting a call on Wednesday at 1400 GMT.
Market Capitalization Impact
According to a note from Warburg Research analyst Christian Cohrs, MTU’s market capitalization has dropped by over EUR2 billion since the issue identified by RTX. Cohrs advises investors to stay on the sidelines for now, as he does not consider the risk-reward profile of the investment to be appealing at this stage.
Engine Inspection and Grounding
In July, RTX disclosed that suspected contaminated metal in some engine parts would necessitate accelerated inspections and grounding of planes. Approximately 350 Airbus jets will be grounded each year for engine inspections over the next three years.
Airbus, the European plane maker, reassures that this issue will not affect its plans for delivering 720 planes to customers this year or its production ramp-up next year. However, they will continue to closely monitor the situation and assess any potential long-term impact based on inspection outcomes.