Bombardier Inc. T.BBD.A

Nat banK :Target up by 60% (published yesterday)

[lb1temporary]

Part of a report about target revisions in aerospace.

What it means for Bombardier

As of the end of January, Bombardier will become a pure-play business jet manufacturing company following the sale of its Transportation division. We are encouraged by the rebound in business jet flying as this is typically a leading indicator of demand for new business jets as well as aftermarket activity. Late in December, Bombardier announced the sale of 10 new Challenger 350 mid-size jets (which we believe are from the aforementioned Vista Global), which could be a sign that customers are coming back to the market after a number of weak quarters for new aircraft orders. The used business jet market also appears to be quite active with the International Aircraft Dealers Association noting that its dealers recorded 285 sales of pre-owned business jets in December, which was more than double any other month since the start of the pandemic.

This week, Bombardier’s peers reported some improvement in new order activity. For instance, General Dynamics-owned Gulfstream reported a book-to-bill of 0.96:1 in Q4 with indications that order activity continues to get better. Textron, which competes in the mid and light jet segments through its Cessna division, also reported sequential improvement in new jet orders over the past two quarters and expects jet deliveries to improve to ~165 in 2021 from 132 in 2020.

Our current forecast is that Bombardier will deliver 108 business jets in 2021, up only slightly from an estimated 104 in 2020 and down from 142 in 2019 (a ~25% drop in units). However, there could be upside to our forecast if the current positive trends in the market continue. We caution that Bombardier’s revenue is more skewed to the large jet segment, so an easing of international travel restrictions is a likely precondition for new order activity to pick-up meaningfully in that segment.

Bombardier (Sector Perform, target increased to $0.80 from $0.50)

After a difficult last few years and an extremely challenging 2020, we are becoming more constructive on Bombardier shares for two key reasons:

• Liquidity concerns alleviated. On January 29th, Bombardier will close the sale of its Transportation division to Alstom for net proceeds of ~US$4.0 billion (including €500 million in Alstom shares). Bombardier will deploy the proceeds towards debt reduction and while leverage will remain relatively high (we forecast net-debt-to-EBITDA of 4.2x at the end of 2022), the liquidity concerns that have dogged the company for many years will be alleviated. We note that Bombardier’s Alstom shares will be issued at a fixed price of €47.50. Alstom shares are currently trading below this level but have recently traded higher.
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• Business jet market may recover faster than expected. As we noted earlier, the business jet market is recovering much more quickly than the broader aerospace industry and there could be upside to our jet delivery expectations over the next two years if the trends continue.

In our view, Bombardier management will now need to show that it is on the path to materially higher margins and better cash flows before the stock moves sustainably higher. As such, we maintain our Sector Perform rating, but with the asset sales complete and a more constructive end market backdrop, we are comfortable raising our EV/EBITDA valuation multiple (applied to our 2022 forecast) to 6.5x from 6.0x previously. Our new target is therefore $0.80, up from $0.50 previously.

Our estimate adjustments are outlined below. Based on data we track, we believe Q4 business jet deliveries came in slightly better than our prior forecast (34 versus 33) and the company met and perhaps exceeded its target to deliver 12 Global 7500 jets in the quarter. For 2021, we have adjusted the net proceeds from the BT sale slightly higher based on a more favourable FX rate and have made some other minor adjustments. Bombardier will report its Q4/20 results on February 11th .

[bingostar]

WOW a target at 0.80$ or 10% upside that is exciting , the detail of the transaction reveals some dispute to come in regard of liabilities transfer and it seems like the q4 is a bit disappointing. Never is easy with the frenchs , it was not with Airbus nor with carrefour , CDPQ will have to get involve in those disagreements.

[Jim99999]

Thanks for this, lb1temporary. The highlighted text is encouraging. Jim

[PabloLafortune]

The issue now is the debt and interest and the fact that relative to what it "should" be, the EV is very low and that any equity issue if even possible would be dilutive from an EV point of view (ie at 67 cents versus $1.75). The solution of course is a rights offering to existing shareholders. Requires more capital by shareholders of course BUT the shareholder intrinsic value gap

[Jim99999]

That has crossed my mind as well, Pablo. I tried to think of an offer that I would be willing to participate in, couldn't think of one. As well, I get the feeling that the family isn't willing to put another penny in. Man, did you see the offer the Alstom shareholders got? No wonder it was over subscribed. Jim

[PabloLafortune]

Jim, yes that's my view now. (They also lowered the share price Alstom and BBD paid to lower the overall price tag on that part of the deal to make it look like they (Alstom) paid less... So Alstom and BBD together ended up with more shares (76M) than originally contemplated (69M?) but Alstom also issued more shares than originally anticipated owing to the low rights price offering of course.