Will The B/E Aerospace Spin-Off Fly Amid Falling Oil Prices?

(RTTNews) - Early June, B/E Aerospace announced its intention to split into two independent, publicly traded companies, for manufacturing and services.

Upon separation,

* B/E Aerospace (the manufacturing company) will focus on aircraft cabin interior equipment - design, development, manufacturing, certification and direct sales on a global basis;

* KLX (the services company) will look after distribution, logistics and technical services for the aerospace and energy services markets.

The spin-off is expected to be in the form of a tax-free distribution to B/E's shareholders. The transaction is expected to reach completion in the first quarter of 2015.

KLX will begin trading under the ticker symbol KLXI on December 17, 2014.

The "New" B/E Aerospace

Segments

"New" B/E Aerospace will encompass two segments:

1. Commercial Aircraft Segment or CAS, a leading global manufacturer of cabin interior products for commercial airliners;

2. Business Jet Segment or BJS, the largest global manufacturer of cabin interior products for business jets, VIP aircraft, and bespoke custom Super First Class suites for wide-body commercial airlines.

Commercial Aircraft Segment is the major revenue contributor. The segment's Last Twelve Months (LTM) Proforma (PF) revenue was $2.1 billion or 77% of "New" B/E Aerospace PF LTM revenues as of September 30, 2014, while revenues from Business Jet Segment amounted to $598 million and represented the remaining 23%.

Since 2010, CAS revenues have more than doubled and risen at a Compound Annual Growth Rate or CAGR level of 21%, with 190bp of margin expansion. BJS witnessed revenue growth at a CAGR level of 25% from 2010 to 2013, with 840bp improvement in margins.

Backlog

As of September 30, 2014, "New" B/E Aerospace had backlog of about $2.9 billion; with additional ~$5.0 billion of awarded, but unbooked programs. Backlog is well distributed geographically - 33% in North America, 24% in Europe, and 43% from Rest of the World.

Debt & Dividend

At separation, B/E will be capitalized with $2.2 billion of debt and about $300 million of cash on balance sheet.

B/E plans to initiate a $0.76 per share annual dividend, about 25% payout ratio, and target 10% dividend growth per annum. "New" B/E Aerospace's net leverage is 3.4x LTM Adj. EBITDA, but target net leverage is in the range of 2.0x - 2.5x between 2015 and 2017.

Outlook For fiscal 2015

"New" B/E Aerospace is expected to generate revenues of $2.8 billion - $2.9 billion, growth of about 10%, earnings of about $3.00 per share, adjusted EBITDA of about $625 million with 22% margin

This compares to LTM PF revenues of the "New" B/E Aerospace as of September 30, 2014 of $2.7 billion, and LTM PF adjusted EBITDA of $558 million with 21.0% margin.

Three-Year Target (2015 - 2017)

Revenue is expected to grow at high-single digit organic revenues CAGR, and earnings per share to increase at 18% - 20% CAGR level. The company anticipates growing free cash flow to about 100% of net earnings.

KLX Inc.

Segments

After spin-off, KLX will consist of two segments:

1. Aerospace Solutions Group or ASG that provides fasteners, consumable products, and logistics services to over 4,700 aerospace customers around the world

2. Energy Services Group or ESG that provides services and logistics for remote oil and gas drilling sites.

ASG represented about $1.3 billion or 76% of Last Twelve Months (LTM) Proforma (PF) revenues as of September 30, 2014, for KLX, while ESG represented 24% or $412 million of revenues.

Expenses as a standalone company & Debt leverage

The recent sell-off in oil prices is bound to have an impact on ESG, which comprises one-fourth of KLX revenues. This division provides high margin, valued added services, and is considered an important component of future growth.

Within 18 months of separation, KLX is expected to incur $25 million of additional one-time pre-tax expenses, related to accounting, tax, and professional costs, hiring, branding, and costs related to information technology and systems.

KLX also expects to incur pre-tax incremental recurring standalone, public company costs of about $20 million annually.

At separation, KLX will be capitalized with $1.2 billion of senior unsecured notes and will have more than $450 million of available cash on balance sheet.

So, KLX will be levered at approximately 3.0x LTM Adj. EBITDA at the time of separation, which the company calls "prudent", but targets net leverage of 2.0 to 2.5x.

The Bright side

Despite the sharp fall in oil prices, and the net leverage slightly higher than expected, KLX targets higher revenue, higher adjusted EBITDA and better margins for fiscal 2015.

For fiscal 2015, KLX projects revenue in the range of $1.8 billion - $1.9 billion, and adjusted EBITDA of about $460 million, growth of about 11% - 13%, with 24% margin.

This compares with KLX's Last Twelve Months (LTM) Proforma (PF) revenues as of September 30, 2014, totaled $1.7 billion, and LTM PF adjusted EBITDA was $398 million with 23.2% margin.

Fiscal 2015 earnings are projected to be about $3.08 per share, and adjusted earnings to be $4.60 per share.

Adjusted earnings excludes ~$33 million of amortization expense, ~$25 million of one-time costs associated with post spin-off activities, ~$11 million of non-cash compensation costs. Also reflects ~$35 million annual cash tax benefit related to the amortization of goodwill for income tax purposes.

Fiscal 2015 guidance assumes an average cost of a barrel of oil of at least about $70. Currently, the price is around $65.

2015 to 2017 Targets

Revenue is expected to grow at high-single digit organic revenues CAGR, and earnings per share to increase more than 20% at organic CAGR level.

Summary

The stock is currently trading around $78.46, well-off its 52-week high of $101.13. The spin-off amid falling oil prices and slightly higher net leverage may cause near-term pressures, but the company seems upbeat about its growth in 2015 and beyond with emphasis on organic growth. If it achieves the outlined targets, the spin-off could make sense in the longer run.