NBF: Target at 1$ from 70 centsTarget raised as biz jet market showing positive trends
Q1/21 results
Q1 results were in line with preliminary results released earlier this week. Revenue of $1,341 million was ahead of our $995 million forecast. Q1 business jet deliveries were 26 versus our forecast for 19 (including 8 Global 7500 deliveries). The adjusted EBIT margin was positive 2.2% versus NBF at negative 3.3%. Bombardier also reiterated its full-year guidance.
Positive trends in the business jet market
Bombardier's backlog at the end of Q1 was $10.4 billion versus $10.7 billion at the end of Q4, but management indicates that its business jet unit bookto-bill was greater than 1.0x in Q1 and positive order trends continue into Q2. Other business jet OEMs have noted similar positive new jet order trends that are underpinned by a recovery in business jet flying activity. Indeed, according to WINGX, business aviation activity in the U.S. in April was down only 5% from 2019 levels with flying activity potentially on pace to surpass 2019 levels in the second half of this year.
Deleveraging underway
Bombardier has deployed $2.4 billion so far this year towards debt reduction. With liquidity comfortable at $2.6 billion and the company expecting to turn free cash flow positive in 2022, leverage is steadily improving. Management projects 2025 leverage at 3x.
Maintain Sector Perform, but target raised to $1.00 from $0.70
We previously valued Bombardier using an 8.0x EV/EBITDA multiple applied to our 2022 forecast. We are introducing a 2023 forecast for Bombardier and rolling the basis for our valuation to that year. Applying a slightly more conservative 7.5x EV/EBITDA multiple on our 2023 forecast results in a new target of $1.00, up from $0.70 previously.
Maintain Sector Perform, but some encouraging trends
We maintain our Sector Perform rating on Bombardier shares following Q1 results that the company prereleased earlier this week. We would like to see more progress on margins and free cash flow improvement from the company, but we are progressively becoming more positive on the stock: Business jet market strengthening. As we highlight in more detail below, there are some positive trends in the business jet market. Bombardier’s backlog fell slightly to $10.4 billion from $10.7 billion in the prior quarter, but its unit book-to-bill was above 1.0x in Q1 and management indicates the positive order trends have continued into Q2. Bombardier still expects 110-120 business jet deliveries for the full year 2021.
More upside for the stock if results trend towards 2025 targets. Recall that Bombardier is targeting 2025 EBITDA of $1.5 billion (~20% margin) and free cash flow of more than $500 million. In our view, it is too early to assume the company can achieve these targets, but if the company makes steady progress towards them over the next one to two years, we could see material upside in the share price.
Debt is still high but deleveraging underway. Bombardier has deployed $2.4 billion so far this year towards debt reduction. With liquidity comfortable at $2.6 billion and the company expecting to turn free cash flow positive in 2022, leverage is steadily improving. Management projects 2025 leverage at 3x.
We previously valued Bombardier using an 8.0x EV/EBITDA multiple applied to our 2022 forecast. We are introducing a 2023 forecast for Bombardier and rolling the basis for our valuation to that year. Applying a slightly more conservative 7.5x EV/EBITDA multiple on our 2023 forecast results in a new target of $1.00, up from $0.70 previously.
One negative for Bombardier is that one of its key competitors, Dassault, today announced a new business jet program called the Falcon 10X that looks to be a direct competitor to Bombardier’s flagship Global 7500 jet. Business jet OEMs regularly introduce new models so new competition is par for the course. We also note that the Falcon 10X will not enter into service until late 2025 so the competitive impact will likely be muted in the near-to-medium-term