Bombardier Inc. T.BBD.P.D

Full Report from Scotiabank

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Management Call Takeaways: Doubling Down on Plans for ROIC-Accretive Growth and Deleveraging

OUR TAKE: Positive. We hosted an investor call with Bart Demosky (EVP & CFO) and the IR team to dig deeper into BBD’s recently revealed plans for transitioning from a turnaround story to an ROIC-accretive growth story through 2030. The discussion reinforces our positive thesis and boosts our confidence in our forecasts, which could still prove conservative. In particular, we were quite encouraged by management’s reassurance that the competitive landscape is unlikely to trigger a big capex cycle any time soon, the company will maintain production discipline, and deleveraging will remain a top priority. That, along with this week’s debt refinancing transactions (pending completion), makes us feel more confident about potential for shareholder returns and an investment grade credit rating in 2026, if not earlier. We maintain our SO rating while raising our target to C$100 (was C$90) on slight EV/EBITDA expansion to 7.0x (was 6.5x) to reflect our improved confidence in BBD’s long-term strategy. Although the stock has gained ~71% YTD vs. TSX +6.6%, which could create some volatility in the near term, we note valuation remains attractive at 8.5x / 6.6x on 2024E / 2025E vs. comps (including some more diversified players) at 12x / 10x.

KEY POINTS

ROIC-accretive growth. BBD’s long-term growth strategy (to 2030) is not predicated on an increase in bizjet deliveries (Exhibit 1) nor on a clean sheet model. Management is satisfied with a flattish annual production rate of ~150 jets from 2025 onward. We believe the company has capacity to build ~180 jets a year. This discipline should bode well for backlog quality and pricing, in our view. Our calculated top-line CAGR of 3.5%-7.0% to 2030, based on BBD’s segment targets, is almost entirely driven by three high-margin streams, namely aftermarket, defense and pre-owned aircraft. These business lines are not only higher-margin but also ROIC-accretive as they require minimal capex. Management particularly seems quite confident about aftermarket growth potential (organic as well as inorganic).

Clean sheet vs. derivatives. Management doubled down on its intention to pursue only derivatives (typically cost only a few $100M’s) over the next several years, noting that the current portfolio is quite competitive as comps are not posing a serious threat with their announced models (mostly derivatives). However, we think technology could be a potential driver of a clean sheet design, but even in such a scenario, we would expect BBD to adopt an effective risk-sharing model with its key partners (suppliers and governments).

Deleveraging. BBD remains focused on debt and liquidity management, as evidenced by another round of refinancing announced this week. It is issuing $750M notes due 2032 (upsized from $500M), priced at 7.0% coupon, which together with cash on hand would help retire $338M of 2026 notes (7.125% coupon) and $450M of 2027 notes (7.875% coupon). Following this transaction, we think BBD only needs to address the remaining 2027 maturity (Exhibit 3). Further, management aims to reduce debt by another $800M by end-2025.

• Quarterly Financials
• Yearly Financials

Historical price multiple calculations use FYE prices. All values in US$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Qtly FCF (M)	Q1	Q2	Q3	Q4	Year	FCF Yield
2023A	$-247	$-222	$80	$646	$257	6.8%
2024E	$-387A	$-236	$104	$770	$250	4.4%
2025E	$-106	$90	$172	$645	$800	14.0%
2026E	$-86	$119	$199	$667	$900	15.7%

Exhibit 1 - BBD is aiming for 35% revenue contribution from higher-margin streams (aftermarket, defense and pre-owned) in 2025 and 50% in 2030 vs. 31% in 2023

Notes:
1. Revenues from sale of new bizjets and components related to commercial aircraft.
2. Revenues from sale of specialized aircraft solutions and pre-owned aircraft.
3. Excludes revenues related to aviation businesses divested in 2020 (aerostructure and CRJ).

Source: Company presentation.

 

Exhibit 2 - Leverage ratio is on track to reach BBD’s target of 2.0x-2.5x by 2025 and potentially <1.5x by 2026, when an investment grade credit rating could be attained

Source: Company reports; Scotiabank GBM Estimates.

 

Exhibit 3 - Pro forma debt maturity profile looks more manageable than ever but still has some room for improvement (hint: more 2027 debt could be retired early with existing liquidity and/or future refinancing)

Note: This chart assumes that BBD will be successful in retiring $338M of 2026 notes and $450M of 2027 notes, as announced on May 21, 2024. It also reflects the new $750M debt offering (2032 maturity; 7.0% coupon), which is expected to close on or about June 5, 2024.

Source: Company reports; Scotiabank GBM Estimates.

 

Exhibit 4 - Bombardier Inc. – Financial Estimate Summary

Note: Net debt doesn't reflect lease liabilities, pension liabilities, and other financial liabilities.

Source: Company reports; Scotiabank GBM Estimates.

Company Overview

Company Description

Headquartered in Montreal, Quebec, Canada, Bombardier is one of the largest manufacturers of business jets in the world, ranging from mid-size and super mid-size jets to large-cabin and long-range jets. The company has operations in more than 12 countries, including production and engineering sites and a growing customer service network across the U.S., Europe and Asia-Pacific. Bombardier has a worldwide fleet of more than 5,000 business jets in service with a wide variety of multinational corporations, charter and fractional ownership providers, governments, and private individuals. The company is also growing its defense business, leveraging its existing business jet platforms.

Investment Thesis

We like Bombardier as a growth, margin expansion and deleveraging story against a positive backdrop of strong bizjet demand and low pre-owned inventory levels. Now in its fifth year almost, the current management team has executed better than expected across all KPIs, particularly deleveraging, which is tracking well ahead of the original plan. We believe the company is much better positioned in this cycle than prior downturns with no exposure to macro-sensitive small-cabin bizjets, growing higher-margin revenue streams (aftermarket, defense, and pre-owned), solid backlog of higher quality orders, significantly improved FCF power, highly disciplined capital allocation strategy, stronger balance sheet, and no debt maturity until June 2026.

Key Risks

Global economic recession, geopolitical conflicts, decline in corporate profits or high net-worth individuals, significant rebound in pre-owned inventory, increase in competition, key executive turnover.