CIBC: They stay behind (Title from LB1)Laying The Groundwork Towards A More Sustainable Company
Our Conclusion
BBD hosted its investor day where it outlined its strategy for becoming a more sustainably profitable and FCF-generating company by 2025. While BBD sees a relatively clear line of sight to achieving these targets, it is hard not to acknowledge that the company has underperformed its own expectations over the last five-plus years. Maintain Underperformer rating and C$0.50 price target.
Key Points
Laying The Groundwork Towards A More Sustainable Company: BBD hosted its investor day and outlined plans for becoming a more sustainably profitable company and generating $500+MM in FCF by 2025 (versus 2020’s FCF usage of ~$3.2B). The company provided a four-prong strategy to materially improve profitability, reduce its leverage ratio, and drive stronger cash flow conversion. This includes increasing its Aftermarkets revenue, moving up the learning curve on the Global 7500, executing against its restructuring plan, which is expected to yield $400MM in recurring savings, and prioritizing cash flow towards deleveraging its balance sheet.
Conservative Assumptions Used In Developing The 2025 Targets: BBD’s 2025 targets are baking in conservative assumptions. As well, it does seem like BBD has a good line of sight on hitting its targets, with 90% of its efforts around this broad restructuring plan in progress. This suggests there is upside to BBD’s outlook. Nonetheless, it is also difficult not to acknowledge how BBD has underperformed its own expectations over the last five-plus years. So, while BBD has good visibility on hitting the milestones it needs to hit to become a more sustainably profitable company, we need to see more consistent execution from the company before we become more optimistic on its turnaround plan.
Base 2025 FCF Target Not Enough To Drive Material Upside: If we take BBD’s 2025 targets as is, the question returns to what is the right multiple for a pure-play business jet OEM? At this juncture, we would make the case that autos/auto suppliers represent a good benchmark given it is also a highly cyclical industry that is capital intensive. Looking back the last decade, the S&P Autos & Auto Components Index has traded at an ~8% FCF yield to EV. If we apply just a 50 bp-100 bp premium to this historical average (i.e., 8.5%- 9% target yield) to account for BBD’s risk profile, apply this to the company’s 2025 targets, and discount this back to 2022 (our target year), we don’t see much upside to where it is trading at right now. As result, we remain on the sidelines