Aerospace and Defence Update: 2Q Aero results wrap-up

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Aerospace and Defence Update

2Q Aero results wrap-up

Price Objective Change

2Q26: strong earnings and cash led by aftermarket

2Q Aerospace results so far reinforce our positive view of the cycle, with strong

earnings and better-than-expected FCF generation led by Civil aftermarket. Safran’s

beat was driven by Civil aftermarket and Propulsion, with management increasingly

constructive on both the aftermarket cycle and medium-term earnings outlook. Rolls

delivered EBIT beats across all three divisions, with FCF well ahead of consensus, and

MTU raised FY26 cash conversion guidance to 50-60% from 45-55%. OE results were

also encouraging. Airbus delivered a strong Q2, with adj EBIT and FCF ahead of cons,

providing further evidence of improving operational execution. Boeing’s return to

positive quarterly FCF was another positive datapoint as aircraft deliveries increased.

The exception was Melrose, where a solid underlying performance was overshadowed

by the Garden Grove disruption. Overall, aftermarket remains the key source of upgrades,

but improving OE execution and cash generation could drive earnings upgrades into H2.

Aftermarket strength continues to surprise positively

Aftermarket remains the main source of upside to earnings and cash, with the strength

broad-based across the complex. At Safran, pricing and shop-visit volumes were broadly

in line with expectations, but CFM56 workscope continued to surprise positively as

material availability improved. Mgmt expects this tailwind to continue into 2027-28,

prompting our mid-term FCF upgrades by c4-10%. Rolls’ delivered strong FCF in H1

(almost £2bn vs cons of £1.15bn), driven by higher underlying profitability and strong

Civil Aerospace shop-visit activity. We thus raised our mid-term FCF ests, by c6-8%. Civil

Aerospace benefited from sizeable LTSA catch-up benefits that are unlikely to repeat,

but we see it as further sign of the margin opportunity within the installed base.

Commercial MRO was a standout at MTU, with Q2 revenue up 37% and continued

strength in GTF alongside an inflection in independent MRO. Melrose reported 15%

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