CIBC ReportEQUITY RESEARCH
December 1, 2021 Earnings Update
BRP INC.
Supply Chain Stalls, But Revving Up Into F23
Our Conclusion
Solid Q3 results in tough conditions do little to change our bullish view on BRP. We continue to see the company as well-positioned to take market share in F23 and beyond, driven by innovation and capacity expansions. Valuation reflects concerns over peak earnings, but we expect retail demand to remain strong in F23 (at least), with inventory replenishment a back-stop to earnings, once feasible. Our estimates are little changed, our price target edges up to $135 (was $134), and BRP remains Outperformer rated.
Key Points
Strong (Implied) Q4 Reflects Revenue Momentum, Boosted By
Accounting: Management updated guidance with moderated revenue
growth due to supply chain constraints, while earnings growth was tightened at the top-end. Ranges remain wider than normal given only two months to go in the year, but supply chain constraints add uncertainty in timing. Q4 revenue growth should be substantial (CIBCe +29%) and a large re-acceleration from the Q3 blip, but we are comfortable given the added capacity. The company’s strategy of shipping nearly complete units also adds timing uncertainty. These units are not recognized as revenue until completely finished by dealers, and the timing could easily swing based on when (not if) components are available.
Outlook For Growth In F2023 Remains Strong: Management also re-affirmed expectations for double-digit earnings growth (from the mid-point of F22 guidance). We believe this is credible given the myriad growth drivers the company has underway and on the horizon: Juarez 3 is ramping and is expected to add nearly $1B of SSV revenue in F23; PWC and Switch are seeing excellent demand and supported with capacity expansion; Project Ghost will bring new marine products in H2; excellent demand in snowmobiles; strong momentum in 3WV. And all of this is supported by a strong and improving distribution network, strengthened marketing capability and a culture and infrastructure supporting best-in-class innovation. We believe this will be enough to deliver growth in F23, though we note the ~$2B inventory replenishment opportunity as a back-stop. We believe a substantial
amount of this will spill into F2024.
Valuation Reflects Concern of “Peak Earnings”: BRP shares have been punished in a risk-off environment and the prevailing view that F2022 reflects peak earnings. As stated, we are very confident in EPS growth in F23 and we are increasingly of the view that earnings could grow again in F24. Free cash flow turned negative in Q3 reflecting the large build in inventory, a substantial amount of which is already in dealer hands. We expect this will reverse in Q4 and FCF will be strong in F23, even as capex reaches new heights. Leverage will resume a downward trajectory in Q4 and the reinstated NCIB will likely be exhausted in the next two quarters, setting the stage for another SIB in mid-2022. We see 10x F23 EPS as a compelling entry point, supported by 7%+ FCF yield.