Desjardins : Compelling entry point4Q23 recap—temporarily elevated working capital investment and Global supplier issue provide compelling entry point
The Desjardins Takeaway
We were not surprised by the negative reaction today as FCF remains investors’ #1 focus, and management had not pointed to any supply chain issues of this magnitude on past calls. For 2024, we now forecast revenue of US$8,434m, adjusted EBITDA of US $1,308m (15.5% margin) and FCF of US$215m (down from US$481m), driven by 151 deliveries (76 Challengers and 75 Globals). We expect the bulk of the working capital investment in 1Q (we forecast FCF of -US$468m in 1Q)
Highlights
2024 FCF and margin guidance disappoint—elevated working capital investment and Global supplier issues to blame. BBD expects FCF of US$100–400m (consensus was US$551m) due to US$200500m of working capital investment required to reach the higher pace of deliveries. The main reason for the change in mix is to accommodate a major Global supplier, which is facing issues, and allow it to catch up. This explains the lower EBITDA margin implied by the new guidance as the Global is a much stronger EBITDA contributor with accretive margins than the Challenger.
Management still very confident in its 2025 targets—we are taking a more conservative approach as supply chains and the booking environment are out of BBD’s control. We have taken a more conservative approach as much will depend on the booking environment and the state of the aerospace supply chain in 2025 (two external factors out of BBD’s control). While some might expect working capital to be neutral following a year of heavy investment and inventory build in 2024, we forecast a continued drag of US$172m in 2025 as we maintain a margin of safety for potential parts delays in the supply chain. Consequently, we have lowered our FCF estimate for 2025 to US$753m (from US$869m).
Valuation
Decreasing our target to C$96 (from C$104) as we adjust our estimates and account for the change in FX. Our target is based on an EV/EBITDA multiple of 8.25x on our 2024 EBITDA forecast of US$1,308m. We have adjusted our exchange rate to C$1.35/US$1 (from C$1.34/US$1) to reflect current market rates.
Recommendation
Reiterating our bullish stance. While the stock is likely in the penalty box in the short term, we still believe the C$45/share level provides an interesting entry point for longterm investors with limited downside (see our recent note detailing our upside vs downside scenario analysis)