TD: on tracksQ4/23; Strong Close to 2023 & On Track Towards 2025 Targets
Event
Bombardier reported Q4/23 Adjusted EBITDA of $458 million vs. TD/consensus forecast of $398 million/$415 million.
Impact: SLIGHTLY POSITIVE
We are maintaining our BUY recommendation and C$100 target. We appreciate the market disappointment with 2024 FCF guidance, but believe that the underlying drivers of the lower-than-expected cash flow are logical, and determined by management as necessary for ensuring 2025 and long-term success. Our unchanged target is due to the impact of a 0.5x reduction in our target EBITDA multiple (7.5x) and higher net debt (greater investment in working capital that we do not assume reverses) offset by shifting our valuation period forward by one quarter. Despite the lower-than-expected FCF guidance for 2024, we estimate that the company will deleverage by 0.5x (adjusted net debt-to-adjusted EBITDA) in 2024, and a further 1.0x in 2025.
We remind investors that the company has surpassed all key financial guidance established by management for the past three years, and we see no reason why initial 2024 guidance does not reflect a similar approach. Due to equity market sentiment (not fundamentals), we have factored greater conservatism into our 2024 and 2025 forecasts, reduced our multiple to a level that we believe is irrationally low, but acknowledges that the market's irrational view of the risk could persist for 12- months.
We assume that the negative share price reaction to the Q4 results reflects a market focused only on the lower-than-expected 2024 FCF guide, and a view that it implies greater risk to 2025 financial targets. We believe the focus should be on the strong Q4 results and the numerous other positive factors that support our view that the company will achieve its 2025 targets and drive significant deleveraging. We believe the step-up in FCF from 2024 to 2025 is achievable based on: 1) incremental Adjusted EBITDA; 2) interest savings; 3) reduced working capital requirements; and 4) lower capex. Bombardier is trading at approximately 3.5x-4x our 2025 FCF estimate.
TD Investment Conclusion
We believe that Bombardier's business aviation franchise is strong and that the declining financial leverage, backlog, production plans, and free-cash-flow visibility justify a higher share price.