Chapter 17. The Industrials Special

Capital Goods, Aerospace, Defence & Infrastructure, Models, Metrics & Valuation LONDON IB INDUSTRY DEEP DIVE CHAPTER ROADMAP What We Cover The Industrials sector as understood by London investment banking: Aerospace & Defence, Capital Goods & Machinery, Building Materials & Construction, Engineering & Professional Services, Transport & Logistics, Packaging, Conglomerates, and Environmental Services/Waste. We drill into key metrics, valuation frameworks, and sector-specific due diligence, everything you need to pitch an industrial M&A deal or challenge management earnings.

PART I, FOUNDATIONS Industrial metrics: book-to-bill, backlog, organic growth, aftermarket revenue, utilisation, capex intensity Advanced metrics: EBITDA margin, ROIC, FCF conversion, working capital efficiency, incremental margin Key formulas and worked examples PART II, SUB-SECTOR DEEP DIVES Aerospace (commercial OEM and aftermarket), Defence, Capital Goods, Building Materials, Engineering Services, Transport, Packaging, Environmental, Conglomerates, Industrial Technology, Infrastructure PART III, VALUATION & DILIGENCE EV/EBITDA, SOTP for conglomerates, M&A synergy types, LBO structuring, cyclicality normalisation, red flag checklist PART I: FOUNDATIONS Industrial Metrics I Book-to-Bill Ratio Orders Received / Revenue in Period.

Above 1.0x = growing demand backlog. Below 1.0x = backlog declining. Strong leading indicator of revenue trajectory 6-12 months forward. Order Backlog Total contracted but undelivered orders. Critical revenue visibility metric. Divide by annual revenue to estimate years of production coverage. Aerospace: 2-4 years. Defence: 5-10 years. Organic Growth

Revenue growth excluding M&A and FX. Essential for industrial conglomerates with serial M&A. Separates true operational improvement from deal-driven growth. Aftermarket / Service Revenue Recurring revenue from spare parts, maintenance, and services on installed base. Often 50%+ of profit in aerospace. Aerospace aftermarket trades at 15-22x EBITDA vs OEM at 8-12x. Utilisation Rate Actual production / available capacity.

High utilisation (85%+) = operating leverage and margin expansion. Low utilisation (<70%) = fixed cost burden and margin compression. Capex Intensity Capex / Revenue. Typical industrials: 3-8%. Asset-heavy (airlines, rail): 10-15%. Watch for creeping capex as sign of margin pressure or cyclical downturn. PART I: FOUNDATIONS Industrial Metrics II EBITDA Margin by Segment Industrials margins vary enormously by sub-sector.

Aerospace aftermarket: 25-35%. Construction: 5-10%. Packaging: 15-20%. Testing/Inspection/Cert (TIC): 16-22%. Return on Invested Capital (ROIC) NOPAT / Invested Capital. The gold standard for capital-intensive businesses. Compare to WACC, above = value creation, below = value destruction. Industrial leaders: ROIC 12-18%. Free Cash Flow Conversion FCF / Net Income or FCF / EBITDA. Strong industrials convert 80-100% of EBITDA to FCF.

Poor conversion (<60%) suggests: capex creep, working capital inefficiency, or restructuring drag. Working Capital % of Revenue Receivable days + inventory days − payable days. Industrial working capital typically 15-30% of revenue. Improvement in WC = cash generation opportunity. Incremental Margin / Drop-Through How much additional revenue flows to EBITDA. High drop-through (40-60%) indicates strong operating leverage. Low (<20%) suggests fixed costs are not fully leveraged. Revenue per Employee