OverreactionThanks Marte1377 for posting the highlight from CIBC reaction to the drop. Here is the CIBC's full comment
Concerns Over VistaJet Weighing On BBD Shares
Our Conclusion
BBD shares have been under pressure on financial concerns over fleet operator VistaJet and fears that it could (or could be forced to) start selling its fleet (comprised highly of BBD jets) into the market, negatively impacting BBD’s new aircraft sales. We are of the opinion that the risk of VistaJet aircraft coming to market and cannibalizing BBD sales may not be as significant as feared. BBD is Neutral rated with a C$60 price target.
Key Points
BBD shares were down 6.7% yesterday (January 22) and are down 8.0% YTD. One of the headwinds facing the stock in recent days are concerns over fleet operator VistaJet – specifically concerns over its financial performance and its ability to cover its debt, which has been highlighted in recent media reports. The company has also taken on more debt in recent years to finance the purchase of aircraft. A VistaJet bond issued in May 2023 has been selling off on the back of these concerns, and there is a fear that the fleet operator may be forced into selling aircraft to cover its debt obligations. VistaJet has the largest BBD super-mid to large business-jet fleet in the industry, and the concern is that this could affect BBD’s ability to market its new aircraft if we see an increase in used aircraft enter the market. For reference, according to RadarBox, VistaJet owns 21 Challenger 350s, one Global 5000, 12 Global 7500s and 28 Global 6000s. Below are our thoughts on the situation:
1. We are of the opinion that the risk of VistaJet aircraft potentially entering the used aircraft market and cannibalizing BBD new aircraft sales may not be as significant as feared. Using Radarbox data, we would note that VistaJet aircraft have high utilization rates. We looked at the BBD aircraft type owned by VistaJet and observed that the fleet operator’s utilization of these assets over the past 12 months is relatively high compared to its peer groups. For example, looking at flight activity for the Challenger 350, VistaJet fleet’s flight hours per aircraft is ranked amongst the top three while Globals is consistently ranked at the top. These are not “lightly used” jets, so it is not a foregone conclusion that it would cannibalize new jet sales if these aircraft were to enter the pre-owned market. In addition, we would point to the business aviation industry as still benefitting from good demand fundamentals today even if activity is plateauing. Looking at business aviation activity (number of flights), in 2023 it was ~30% above 2019 levels. Please refer to Exhibits 1 - 5 for a summary of the utilization rate of BBD aircraft over the past year.
2. Our Neutral rating reflects our view that business aircraft deliveries will peak in around 2025. That said, we do expect BBD to report strong Q4/23 earnings with its 2023 guidance de-risked. According to Aviation Week, BBD delivered 39 aircraft in December and 56 in the fourth quarter, bringing its annual total to 138 (on par with BBD’s annual target and in line with our expectations). With BBD hitting its annual delivery target, this alleviates concerns around the risk of BBD meeting its 2023 revenue, EBITDA and FCF guidance. On this last point, reaching its delivery target is a key driver of unwinding working capital and putting it in a position to generate ~$640MM of FCF in Q4/23 and to achieve $250MM+ in 2023.
3. From a valuation and trading range perspective, BBD is now trading at ~$48.75/share. If we look back to January of 2023, the stock has traded between ~$45/share and ~$70/share. BBD is trading at ~6.5x EV to forward EBITDA and looking back five years, 6x EV to forward EBTIDA has been a good floor for the name.