Bombardier Inc. T.BBD.A

RE:Scotiabank ups target to $83, (potentially to $175)

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Here is the rest of the Scotiabank analysis:

KEY POINTS

Surprises in guidance raise. Almost every revised guidance metric positively surprised us except for margin, which is understandable considering the new revenue mix. BBD raised prior 2025 targets to 150 deliveries (was 130 to 135), >$9B revenue (was $7.5B), >$1.625B EBITDA (was $1.5B), >$1.125B EBIT (was $1.05B), >$900M FCF (was >$500M), and 2.0x-2.5x leverage ratio (was 3x). All of these raised targets beat our prior estimates, except for leverage ratio (came in line). However, BBD trimmed 2025 EBITDA and EBIT margin guidance to 18% (was 20%) and 12.5% (was 14%), respectively, which missed us by 100 bp, citing less favourable mix (incremental deliveries but unchanged aftermarket revenue guidance of $2.0B), cost inflation catch-up, and strategic investments (e.g., digitization, R&D for ESG initiatives, and SG&A for new defense and CPO offerings) that will enable more growth and margin stability in the future. Management expects the implied 75% growth in EBITDA vs. 2022 to be driven by G7500 (coming out of launch pricing + learning curve maturity), volume growth (operating leverage), growth in aftermarket services (+$500M revenue), and remaining $70M of $400M cost reduction plan, partially offset by cost inflation and strategic investments.

Approaching investment grade. Management believes a 2.0x-2.5x leverage ratio by 2025 would take BBD closer to investment grade, which would be a remarkable achievement for a company that was near bankruptcy seven years ago. However, management also acknowledged that there is conservatism in leverage goals which suggests an investment grade rating is more likely. We agree that BBD is being conservative. First, our simple math on key FCF drivers over 2023-2025 suggests that FCF could exceed $1.05B in 2025 vs. guidane of >$900M (Exhibit 3). Second, BBD’s end-2022 net debt of $4.3B equates to 2.6x, the low-end of its 2025 EBITDA target ($1.625B) and the cumulative 2023/2025 FCF guidance of >$1.15B (i.e., skipping 2024 FCF) alone equates to a 0.7x reduction in the leverage ratio.

• Quarterly Financials
• Yearly Financials

Historical price multiple calculations use FYE prices. All values in US$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Qtly FCF (M)	Q1	Q2	Q3	Q4	Year	FCF Yield
2022A	$173	$341	$52	$169	$735	19.7%
2023E	$-90	$56	$100	$235	$300	6.8%
2024E	$-35	$82	$112	$267	$425	9.7%
2025E	$47	$158	$218	$377	$800	18.2%

Deleveraging continues, pushing out maturity curve. In addition to the $4.1B (or 41%) debt retired during 2021-2022, BBD has redeemed $1.16B debt so far this year (full 2024 maturity + majority of 2025 maturity), funded with a new $750M debt raised this year (2029 maturity) and the recently released ~$400M restricted cash that was tied to bank guarantees for the divested train business. Overall, it has now reduced long-term debt by ~$4.5B (net of debt refinancing) and interest cost by ~$330M since 2020. By our math, the next maturity is ~$375M, due in March 2025, which we would expect BBD to repay in full. The company’s 2025 FCF guidance assumes $300M-$400M in annual interest costs, suggesting more debt reduction is likely in the next three years. Management is now planning to have a minimum liquidity of $1.0B to $1.5B, including cash on hand and working capital lines, down from $1.5B last year and $2.0B in 2021. Based on our projections, we calculate BBD would have up to $1.2B in excess liquidity by the end of 2025, over and above its minimum threshold, which could potentially be deployed for majority or full repayment of 2026 debt maturity ($1.2B), thereby saving another $85M in annualized interest costs.

 

Expanding new avenues of growth. Besides certifying G8000 (a G7500 upgrade) in late 2025 and growing aftermarket services revenue by 33% through 2025, BBD is ramping up its efforts to grow two new niche segments – defense and certified pre-owned – both launched in ~2022. Leveraging its existing Challenger and Global bizjet platforms, the company is eyeing a significant share of the projected demand for 375 military aircraft over the next 10 years. BBD’s four identified defense aircraft segments – Head of State/VVIP, Maritime Patrol, Surveillance/ISR, and Command and Control – represent about 3,000 active aircrafts globally. It is aiming for >$1.0B in defense revenue (majority deliveries, minority services) in the latter half of this decade, nearly tripling from current levels. Similarly, its certified pre-owned (CPO) business is just scratching the surface with BBD performing a dozen transactions annually vs. ~460 pre-owned transactions taking place each year in the market (pertaining to BBD models).

 

No plans for overwhelming capex. Management is sticking to its $200M-$300M capex run-rate target for the next few years, which largely includes maintenance capital and some regular product enhancements. It doesn’t see the push for new product development (clean sheet design) from customers or competitors, considering the current portfolio is full of new models except Challenger 650. However, we believe innovation is a must to survive and thrive in the bizjet industry, so BBD would be required to invest in new products (at times with heavier capital envelopes) over the long term, perhaps once the leverage ratio has reached the desired levels and FCF becomes more predictable/sustainable (i.e., not before 2026).

 

Exhibit 1 - Revised Estimates – raising 2025E on better-than-expected guidance change; trimming 2024E to reflect reduced long-term margin guidance

* Net debt doesn't reflect lease liabilities, pension liabilities, and other financial liabilities.

Source: Scotiabank GBM Estimates.

 

Exhibit 2 - Leverage ratio is now poised to decline to ~2x by 2025 (near investment grade) even under conservative FCF assumptions vs. guidance

Source: Company reports; Scotiabank GBM Estimates.

Exhibit 3 - 2025 FCF bridge – comparing key cash flow drivers, as guided, for 2023 and 2025 suggests upside risk to 2025 FCF guidance (and to our incrementally conservative estimate)

Source: Company reports; Scotiabank GBM Estimates.

 

Exhibit 4 - Bombardier Inc. – Financial Estimate Summary

* Net debt doesn't reflect lease liabilities, pension liabilities, other financial liabilities, and restricted cash (until 2022).
** Operating cash flows, capex and FCF adjusted for discontinued operations.
Note: Unless noted otherwise, comparable 2020 and 2019 financials may include results for discontinued operations (train, commercial aircraft, and aerostructures).

Source: Company reports; Scotiabank GBM Estimates.