TD: Target at 1,20$ from 1,15$Q1/21; Early Execution and Cyclical Forces Support Upside
Event
Bombardier reported Q1/21 Adjusted EBITDA (from continuing operations) of $123 million, ahead of our prior forecast of $90 million. Adjusted EPS from continuing operations was -$0.07. All key metrics were ahead of our forecasts prior to the prerelease.
Impact: SLIGHTLY POSITIVE
We are maintaining our SPEC BUY recommendation and increasing our target price to C$1.20 from C$1.15. Our updated target price is the net result of one less quarter of discounting our year-end 2022 equity value and slightly higher 2023 (valuation period) EBITDA forecasts, partially offset by higher valuation period average net debt. We continue to believe that a 2023 valuation period is reasonable, given the $400 million of run-rate cost-savings expected by the end of 2023.
The Q1 results provide us with greater confidence in the company's ability to meet, or exceed its 2021 guidance. While leverage is expected to decline modestly for the foreseeable future, we believe that improving FCF and steadily increasing EBITDA will limit leverage concerns and keep investors focused on the share price upside potential based on the long-term margin opportunity and higher valuation multiple potential. 2021 guidance and 2025 financial objectives were maintained (introduced on March 4). Overall, we view the Q1 results as demonstrating progress towards management's successful stabilization of the business, providing deleveraging benefits from the sale of Transportation, and supporting our view of the early stage of the business jet cycle.
Bombardier's plans for Global 7500 learning curve cost reductions, labour and manufacturing footprint productivity, along with indirect spending reductions, are expected to drive significantly higher margins. The expansion phase of the business jet cycle appears to have a strong start and we believe that the pandemic could result in new consumers of private jet travel as a substitute for the business class cabin on commercial aircraft.
TD Investment Conclusion
We believe that Bombardier's business aviation franchise is strong and that there is the potential for long-term EBITDA and FCF that justifies a higher share price. Although financial leverage remains high and elevates the risk profile of a standalone business jet company, we believe that risk-adjusted upside justifies acquiring the shares