Nat. bank: 1,07? 1,16$ ? maybeQ3/23 results ahead of forecast
We maintain our Outperform rating on Bombardier shares following Q3/23 results that were ahead of forecast. Bombardier shares are down ~35% from highs earlier this year as investors have grown concerned over the sustainability of demand in the broader business jet market. However, the company’s Q3 report and outlook demonstrate that business jet market conditions broadly remain healthy, and we believe Bombardier’s backlog will support ongoing improvements in both earnings and cash flow.
Backlog down a bit, but order activity still appears solid. Bombardier delivered 31 jets in Q3 versus our forecast for 26 and management remains confident in delivering 138+ jets for the full year (implied Q4 deliveries are 56 planes – we count seven deliveries so far in the quarter based on data we track). A key investor concern for Bombardier and the broader business jet market is that new orders would slow given the uncertain economic environment. Bombardier’s Q3 unit book-to-bill came in at 1.1x, but dollar backlog fell slightly to $14.7 billion from $14.9 billion in the prior quarter. Management indicates that order activity remains strong and is confident in hitting a full-year book-to-bill of around 1.0x, noting that it expects to close several multi-plane deals in Q4. Longer term, Bombardier’s goal is to maintain backlog at 18-24 months of forward deliveries (backlog is in that range currently).
Margins on track. Progress towards Bombardier’s 2025 EBITDA margin target of 18% is a key driver of the investment thesis for Bombardier. In Q3, the adjusted EBITDA margin came in at 15.4% versus our 15.0% forecast and 14.4% in Q3 last year. While delivery mix can impact margins quarter-to-quarter, the Q3 margin performance gives us confidence Bombardier can reach its target in 2025.
Free cash flow to trend much higher in Q4 and beyond. Free cash flow in Q3 was $80 million versus our forecast for $6 million. The company reiterated its guidance to hit $250+ million in free cash flow for the full year, implying $600+ million in Q4 driven by the partial unwinding of the significant inventory investment made in the first nine months to support a higher jet delivery rate. Looking ahead to 2024, we note that in addition to expected higher EBITDA, FCF will see tailwinds from no residual value guarantee cash payments (~$125 million), likely lower capex (as the significant investment in the new assembly plant in Toronto will be largely completed this year) and lower interest expense due to lower full-year debt levels.
Material potential upside to shares as the company continues to execute. If Bombardier can achieve its 2025 EBITDA target of $1.6 billion, based on a reasonable 7.0x EV/EBITDA multiple, we would derive a future valuation of ~C$116.00/share. Using our more conservative 2025 estimate, we still derive an undiscounted future target of ~C$107.00/share, which is materially higher than where the stock is currently trading.
Target and rating
We continue to base our valuation on our 2025 estimates, which assumes EBITDA of ~$1.53 billion (versus management’s $1.625 billion target). We apply a 7.0x EV/EBITDA multiple to our 2025 estimate (prior cycle low valuations for some of Bombardier’s business jet peers were in the 7-8x range). This results in a future target of C$107.19 which we discount by 10%/year to arrive at our target. Our target of C$93.00 is unchanged