The role of compounders in the Corporate Life Cycle

In our view, Safran displays the qualities of a ‘Compounder’ due to its dominant position in the provision of aircraft engines for single-aisle commercial planes. We believe it has an investment moat here, with exclusivity in sourcing for the Boeing737 MAX and a 60% win rate for Airbus A320neo. Consequently, Safran enjoys high returns on capital, supported by high-margin aftermarket services (i.e. necessary servicing of engines) where they have revenue visibility into the 2030s [1].

Safran is a stock we hold across our portfolios. However, one of its main attractions to us is the role it plays in the Royal London Global Equity Transitions Fund.

It is a simple truth that people will always love to travel. Driven by a growing global population, higher wealth per capita and an increasing focus on experiences over possessions, the aviation industry has consistently grown ahead of global GDP [2] [3]. According to BloombergNEF Research, total passenger trips are expected to increase to 10.7bn by 2050, from 4.7bn in 2024 [4]. The harsh reality, therefore, is that the aviation industry will contribute an ever-increasing amount to global greenhouse gas emissions.

We believe that the ‘hard-to-abate’ sectors like aviation still play an important role. Instead, we view these types of companies as ‘Improvers,’ meaning they are seeking to improve their own ESG credentials.

Figure 1: Corporate Life Cycle

For illustrative purposes only

Our Transitions assessment is that Safran is both an Enabler and Improver aligned with our Climate Stability theme. Through its RISE (Revolutionary Innovation for Sustainable Engines) programme, Safran is targeting a 20% improvement in fuel efficiency as well as 100% compatibility with sustainable aviation fuels. Safran is targeting 4.5% of revenue towards research and development, of which over 75% is directed towards environmental efficiency and low carbon compatibility of engine. So, a significant amount of capital is being directed towards enabling further decarbonisation. Lastly, Safran has set SBTi (Science Based Targets Initiative) to reduce its Scope 1 and 2 emissions by both 2025 and 2030, as well as Scope 3 emissions intensity by 2035. [5]

In our regular meetings with management, we continue to assess progress on the RISE programme. which is material for both the Investment and Transitions thesis. So far, our view on progress remains very positive. However, any deterioration in the Transitions thesis would lead us to question and – if we deem the thesis to be broken – exit our position. The latter has been the case for two of our US-based holdings this year.

Meanwhile, our Responsible Investment team is also actively engaging with Safran through our Net Zero Stewardship Programme. While Safran is not yet aligned with our proprietary Climate Transition Assessment, we are committed to driving progress through sustained dialogue and collaboration. Our engagement aims to strengthen the company’s climate strategy, with a particular focus on:

• Scaling the supply of sustainable aviation fuel (SAF) through partnerships with policymakers and industry stakeholders.
• Seeking to mitigate biodiversity risks associated with aviation operations.
• Accelerating near-term emissions reductions by promoting tangible implementation measures.

We view this as a strategic opportunity to influence meaningful change and support Safran’s transition towards a low-carbon future.

[1] www.safran-group.com/finance/analysts-and-investors
[2] www.planestats.com/OliverWymanQuarterlyAEA3Q2024.pdf
[3] https://tradingeconomics.com/world/full-year-gdp-growth
[4] Race to Net Zero: Challenge of Greener Aviation in Five Charts | BloombergNEF
[5] https://www.safran-group.com/group/history-and-heritage/timeline/2021-launch-rise

For professional investors only. This material is not suitable for a retail audience. This is a marketing communication. Capital at risk. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. The views expressed are those of the author at the date of publication and are subject to change without notice.  Reference to any security is for information purposes only and should not be considered a recommendation to buy or sell. Portfolio holdings are subject to change without notice. Forward looking statements are subject to certain risks and uncertainties, Actual outcomes may be materially different from those expressed or implied.

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