CIBC: Still A Lot Of Heavy Lifting To Be Done
Our Conclusion
While BBD’s sale of its Transportation division for $3.6B was a significant liquidity event, it does not change our cautious outlook for the company. There remains a lot of heavy lifting to be done as BBD looks to improve the structural profitability of its business jet operations while sitting on an elevated debt position. We maintain our Underperformer rating and C$0.50 price target.
Key Points
BBD’s sale of its Transportation division was a significant liquidity event for the company, but it does not change our cautious view on the company.
Even With $3.6B In Net Proceeds, There Is Still A Lot Of Debt: Post the sale of Transportation, BBD noted that pro forma net debt is ~$4.7B as of December 31, 2020 and the company intends to use the $3.6B proceeds from this transaction to actively deleverage. While this transaction is key to BBD’s debt-reduction efforts, we still see the company sitting at an elevated debt position. With BBD guiding to EBITDA of over $500MM, but FCF usage of less than $500MM this year, we forecast the company’s leverage ratio exiting 2021 at ~10x, with its net debt deteriorating to ~$5.3B. It is also unclear whether BBD will be in a position to generate any significant FCF in 2022.
Increasing Profitability Is Key
But Will All Restructuring Savings Flow Into Earnings?: BBD continues to indicate that its goal is to generate FCF through the business jet cycle. In a recent note (link), we calculated that Aviation’s EBIT margin would need to hit ~9% (in 2019 it was 6.4% on 142 deliveries). Not an impossible target to reach when looking at some of its peers and the positive mix impact from delivering more Globals, but a definite high-water mark for the company. While increasing production rates, moving up the learning curve on the Global 7500 and the expansion of its service revenue stream will help, another key driver is BBD’s restructuring efforts. With its Q4 results, BBD highlighted its restructuring plan which calls for $400MM in savings by 2023, with a one-time restructuring charge of ~$50MM in 2021. The question we have is whether this translates into direct earnings growth for the company given its history? We would argue that BBD has been in a state of perpetual restructuring since 2014, which has supposedly yielded ~$1B in cumulative savings at the total cost of ~$600MM. We are hard pressed to see how these savings translated into earnings growth for the company looking back the last five years.