Bombardier Inc. T.BBD.A

RE:RE:RE:RE:RE:RE:RE:Deliveries

[NoNameAtAll]

Here is the detailed report from Scotiabank that I mentioned in my earlier post.  See the paragraph titled "Managing supply chains better than industry."  About halfway through the pararagraph it states that it appears that engines remina one of the last remaining supply chain challenges fro BBD.  It then goes on to state that this year's targeted deliveries are already secured.  This report is dated September 12, 2023 and is written by Konark Gupta.
 

Management Meetings Reinforce Positive View; Multiple Catalysts Ahead

OUR TAKE: Positive. We hosted investor meetings with Bart Demosky (EVP & CFO) and the investor relations team. The discussions involved several topics from bizjet cycle to supply chain to growth drivers to debt. BBD is making solid progress in all aspects. We came away more confident in our outlook and now think our 2024-25 estimates could prove conservative as BBD appears to be on track to achieve or exceed its recently raised 2025 goals. Our Q3 FCF estimate could also have upside risk from apparently solid order activity. However, we plan to revisit all our estimates around quarter-end. Shares have pulled back ~30% over the past 5.5 months as we believe the market has grown concerned about macro and pre-owned inventory, which makes BBD the most appealing stock in our coverage, in terms of upside potential. With EV/EBITDA valuation compressing to 6.2x on 2024E, we see potential for 35%+ upside in the near term and ~150% within 1-2 years if BBD maintains solid execution and industry fundamentals remain supportive. We re-iterate our Sector Outperform rating and C$84 target, expecting 2H FCF, 2025 execution, defense orders, deleveraging, and shareholder returns as potential catalysts over the coming quarters and years.

KEY POINTS

Bizjet cycle remains in upswing. Management remains confident about ~1.0x book:bill this year, implying ~1.0x in 2H despite nearly 70% growth in 2H deliveries vs. 1H, based on QTD order activity and order indications for the rest of the year. Similarly, it continues to target increased production rate of ~150 jets in 2025 vs. >138 this year. Although pre-owned inventory levels are rebounding off of the lows (2%-3% in Q1/22), they are still quite low at 5%-6% vs. 11%-14% normally. Hence, demand for BBD’s bizjets remains strong, particularly for Challenger 3500, driven largely by fleet operators (flying activity is +50% vs. pre-pandemic on HNWI demand). Pricing is also up y/y. Light jets are witnessing relative pressure due to greater macro sensitivity, but BBD exited this segment in 2021.

While resilient revenue streams are growing. Aftermarket revenue is growing nicely, having reached a record $1.7B annualized run-rate in 1H, driven by recent and ongoing footprint expansion, market share gains and fleet operators’ increased usage. In fact, aftermarket revenue has exceeded BBD’s expectation, and we see potential for upside to its original $2.0B target for 2025, which could also be accretive to margin guidance. Defense is another area of resilient revenue stream that could potentially grow much faster than other segments over the next several years. We believe the company is currently generating $200M-$300M in defense revenue, which it aims to increase to over $1.0B beyond 2025. It is bidding on a number of programs, leveraging its Global bizjet platform, and is likely to announce a few contracts shortly. For example, the Swiss Air Force has decided to acquire a Global 7500 jet for $109M (including modifications), while CAE’s recent Global 6000/6500 simulator order win for the U.S. Army’s High Accuracy Detection and Exploitation System (HADES) program suggests a potential order for BBD jets. Lastly, BBD continues to see growth opportunities in the certified pre-owned (CPO) market. Continued inside...

• 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	19.6%
2023E	$-247A	$-222A	$-82	$817	$266	7.2%
2024E	$-128	$-26	$13	$571	$430	11.9%
2025E	$-60	$49	$155	$680	$825	22.9%

Managing supply chains better than industry. Most of the aerospace and defense industry is going through supply chain pains (latest example is RTX’s Pratt & Whitney GTF engines). Some of BBD’s competitors have faced delays in new product certification (due to a host of factors) or deferred new product development (due to engine issues). However, the company appears to be navigating supply chain challenges relatively smoothly, thanks to its proactive approach and boots on the ground. It has insourced some suppliers’ capabilities or acquired a few suppliers in order to control the supply chain better. Still, it appears that engines remain one of the last remaining challenges for BBD (though it has no exposure to Pratt & Whitney). That said, this year’s targeted deliveries are already secured and BBD is taking a measured approach to production rate increase through 2025. In a way, the solid demand backdrop and constrained supply chains are likely supporting pricing momentum for longer. Further, the business aviation industry is relatively less impacted by pilot shortage as compared to the commercial aviation industry.

 

Laser focused on deleveraging and capital discipline. BBD has already cut the long-term debt in almost half since 2020 through proceeds from asset sales and strong FCF generation. Its net debt to LTM EBITDA ratio has materially improved to 4.5x as of Q2/23 from 7.7x in 2021 and management remains committed to 2.0x-2.5x by the end of 2025. We forecast 3.5x by the end of this year. The company burnt cash in 1H of this year, which has historically been the case (plus there was a non-core RVG payment and likely an engine supply chain issue this year), but it expects significant FCF generation in 2H (highly skewed to Q4) on strong order activity and inventory reversal upon deliveries. Management’s 2025 targets and near-term visibility suggest continued strong earnings growth over the next two years along with increased FCF (BBD targets >$900M FCF in 2025), which it could potentially deploy toward further debt retirement (i.e., more interest savings and improved FCF power). We see potential for a full repayment of the 2025 maturity ($380M) and partial/full refinance of the 2026 / 2027 maturities ($1.3B / $1.9B), depending on FCF generation, interest rates and credit rating. We believe BBD could also consider shareholder returns (dividend and/or buybacks) along with potential M&A once the leverage ratio targets are met. Management intends to remain disciplined on capital allocation with $200M-300M annual capex through 2025 (this year is an exception due to the new Toronto facility).

 

Exhibit 1 - BBD debt maturity profile

$ millions

Source: Company reports; Scotiabank GBM.

 

Yet, not losing sight on competitiveness. While BBD is keeping capital intensity low through 2025, it is not losing its competitive positioning even as Gulfstream and Dassault are launching new products in the medium and large cabin segments. The company’s portfolio of bizjets is largely up-to-date except for Challenger 650, which is in a segment that we think is not witnessing robust demand (unlike Challenger 3500). Thus, we expect BBD to remain competitive with its six models (five in production and one in development) for at least a few more years. Once management has achieved its leverage ratio targets, we believe it could invest in a new product, potentially a mid-size jet in an underserved segment, based on customer feedback and project IRR. The Global 8000, currently in development, remains on target for entry-into-service in 2025, which would preserve BBD’s competitive position relative to Gulfstream (G800 could enter into service next year).

 

Exhibit 2 - Bombardier Inc. – Financial Estimate Summary

* Net debt excludes 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).