National Bank Financial analyst Cameron Doerksen expects Canada’s aerospace sector to “continue to show strength” in 2024, emphasizing “visibility for growth remains high.”
“2024 should see completion of air travel recovery – still room to go to get back to trendline,” he said. ”According to IATA, global revenue passenger kilometers (RPKs; domestic plus international) in November (the latest reported month) were down just 0.9 per cent compared to the same month in 2019 with domestic RPKs up 6.7 per cent and international down 5.5 per cent. IATA estimates that global RPKs in 2023 will come in 4.8 per cent below 2019 with the total number of scheduled passengers 5.6 per cent lower than 2019. However, IATA projects that global passenger traffic will fully recover to 2019 levels by the end of 2024 with RPKs finishing the year 4.5 per cent ahead of 2019 and the number of scheduled passengers 3.6 per cent higher (4.7 billion versus 4.5 billion in 2019).
Also seeing a “healthy” business jet market and expecting aircraft production rates to climb, Mr. Doerksen said all four of his top picks for the year in his Transportation/Industrials coverage universe are “broadly informed by [his] preference for stocks in the Aerospace sector.”
They are:
* Bombardier Inc. (BBD.B-T) with an “outperform” rating and $94 target. The average on the Street is $77.87.
“We expect Bombardier will deliver higher profitability and free cash flow through 2025 supported by a solid $14.7-billion backlog and generally healthy business jet end-market conditions,” he said. “Management has guided to 2023 free cash flow of $250 million. Looking ahead to 2024, we note that in addition to expected higher EBITDA, FCF will see tailwinds from no residual value guarantee cash payments ($125 million), lower capex and lower interest expense. We forecast 2024 free cash flow of $475 million. For 2025, we forecast FCF of $779 million, which will drive leverage down to a forecasted 2.1x at the end of 2025 versus a forecasted 3.7 times at the end of 2023. If Bombardier can achieve its 2025 EBITDA target of $1.6 billion, based on a conservative 6.5 times EV/EBITDA multiple, we would derive a valuation of $103.00 per share or 93-per-cent upside from the current share price.”
* CAE Inc. (CAE-T) with an “outperform” rating and $36 target. Average: $35.63.
“While the pace of margin improvement in CAE’s Defence sector has been a disappointment (and the main impediment to a higher share price in 2023), we remain very positive on the Civil segment (approximately 75 per cent or more of total company operating income) where results have come in better than expected so far in F2024,” he said. “CAE should enjoy growth in its Civil segment over a multi-year period supported by underlying airline pilot training demand and higher full flight simulator deliveries. We also expect Defence margins to eventually show improvement underpinned by very supportive growth in global defence spending that will drive new order activity.”
* Hroux-Devtek Inc. (HRX-T) with an “outperform” rating and $19 target. Average: $19.10.
“Supply chain issues and inflationary costs will remain ongoing challenges for HRX over the coming quarters, but we see throughput and margins progressively improving over the next two years,” he said. “In the meantime, as we have noted, demand in both the Defence and Civil segments for HRX remains very strong, which is the primary factor supporting our Outperform rating. Valuation is also attractive: on our F2025 forecast (in which we forecast more normalized margins), HRX shares are trading at 7.9 times EV/EBITDA versus the aerospace supplier peer group at 11.6 times next year EV/EBITDA.”
* Exchange Income Corp. (EIF-T) with an “outperform” rating and $62 target. Average: $63.45.
“Exchange Income will see growth through 2024 and into 2025 that is underpinned by new contract wins including the B.C. and Manitoba medevac contracts (ramping through 2024), new surveillance activity, a new contract at PAL Airlines to support Air Canada (ramped in early 2024), as well as expected organic growth in the windows businesses over the next two years supported by growing demand for new housing,” he said. “We therefore have confidence that the company can grow EBITDA from a forecasted $553 million in 2023 to the management guidance range of $600-$635 million with potential upside should the company consummate additional acquisitions.”
Beyond strength in the aerospace industry, Mr. Doerksen highlighted four other themes to watch in the 12 months ahead:
* A “soft” freight market with the potential for inflection later in 2024.
“We remain generally neutral on our freight-related coverage universe as near-term freight volumes may remain relatively soft. A potential inflection point for freight demand may come later in 2024, however,” he said.
* Consumers will “likely to be more stretched.”
“A more challenging backdrop for consumer spending is likely to persist in 2024, although the valuations for consumer-exposed stocks in our coverage universe are already reflecting a softer demand outlook. Although we see good value in Air Canada and BRP Inc., investor sentiment could be a headwind for both stocks,” h said.
* An easing supply chain.
“This should be especially positive for NFI Group and Hroux-Devtek in our coverage universe,” he said.
* Lower interest rates may “boost high dividend payers.”
“If interest rates are cut in 2024, as is widely expected, it could be positive for Exchange Income and Mullen Group,” he said.