Desjardins : target at 50 cents3Q recap—more details needed on flight itinerary before getting onboard
The Desjardins Takeaway
BBD reported in-line FCF in 3Q despite slightly weaker profitability. Management reiterated its FCF breakeven guidance for 2H20 (we now forecast -US$20m). Management is currently conducting a company-wide review of its cost structure to ensure that the manufacturing business is profitable at current production levels (100– 120 deliveries per year). We prefer to wait for further clarity on this initiative and its debt management strategy before revisiting our investment thesis.
Highlights
In-line FCF generation in 3Q. FCF of -US$655m was in line with consensus of -US$651m (we expected -US$548m). Usage was mainly due to working capital consumption in anticipation of a strong 4Q, including 12 Global 7500 deliveries (up sequentially from eight deliveries in 3Q). Adjusted fully diluted EPS of -US$0.13 (-US$0.09 excluding discontinued operations) was below our estimate of -US$0.07 and consensus of -US $0.08.
Breakeven FCF outlook for 2H20 reiterated. BBD did not provide formal guidance, but management reiterated that FCF should break even in 2H20, assuming operations remain uninterrupted by the pandemic (in line with our forecast and consensus). We now forecast FCF generation of US$686m in 4Q20.
Further details on restructuring plan needed to assess the full potential of the division. Management is currently conducing a company-wide review of its cost structure to ensure that the manufacturing business is profitable at current production levels (100–120 deliveries per year). Management noted that the company currently has infrastructure to support an annual production run rate of ~200 aircraft. It expects to provide further details on its cost-cutting initiatives and debt management strategy during an investor day following the completion of the BT divestiture.
Valuation
Reducing our target to C$0.50 (from C$0.60) as we adjust our forecasts. Our target is based on an EV/EBITDA multiple of 7.0x on our 2022 EBITDA forecast. We use an exchange rate of C$1.31/US$1.
Recommendation
Reiterating our Hold rating. We continue to believe that BBD’s indebtedness is too elevated (especially due to COVID-19) to justify buying the stock at this point.