TD maintains 5$ targetEvent:
Bombardier reported Q4/18 EBITDA excluding Other Income of $393 million vs. TD forecast of $293 million and consensus of $343 million. Adjusted EPS was $0.05 (TD/consensus: $0.01/$0.02).
Impact: NEUTRAL We are maintaining our SPECULATIVE BUY recommendation and C$5.00 target price. Our unchanged target price is the net impact of an increase in our valuation period EBITDA forecast, higher CSALP equity value, and higher valuation period net debt. Book-to-bill ratios in Business Aircraft and Transportation suggest strength in these key segments, which account for over 80% of our target price. Management's maintenance of existing guidance is encouraging, and it is not reflected in the current valuation or share price weakness in late-2018. Q4/18 FCF benefited from a number of non-recurring asset sales, which in turn allowed the company to reach its fullyear guidance. Regardless, we believe that the deleveraging that is underway should be positive for Bombardier's valuation and help shift investor focus to the long-term EBITDA and EPS potential of the business. Q4 results are a positive step towards relieving persistent market concerns over Bombardier's FCF, and in particular, cash flow challenges emanating from the Transportation segment. The well-publicized challenges on certain Transportation contracts appear to be reflected in the unchanged guidance for 2019. The acquisition of the Global 7500 wing program from Triumph Group, although requiring close to $250 million in additional cash in 2019, is expected to significantly de-risk the rampup of this key driver of Bombardier's growth in 2019 and 2020. We believe that Bombardier's valuation at 4.7x 2020 forecast EBITDA, compared with comparables at 8.8x, fails to reflect the long-term value potential while attributing too much risk to the company's declining financial leverage.
Ongoing portfolio reshaping could benefit shareholders by simplifying the business while focusing on core products that offer better competitive positioning and growth potential. TD Investment Conclusion We believe that management is executing strategically and that long-term upside beyond 12 months exists. We believe that the depressed share price has overly discounted commercial aerospace backlog trends and cash flow uncertainty, and that the current valuation represents a compelling investment opportunity.