BNS Initiate Coverage Calling it a “a high-growth machine,” Scotia Capital analyst George Doumet initiated coverage of BRP Inc. with a “sector outperform” recommendation on Friday.
“BRP is a high-quality cyclical that has compounded adjusted EBITDA by a CAGR [compound annual growth rate] of 15 per cent from fiscal 2015 to 2022 and adjusted EBITDA per share by a CAGR of 25 per cent due to its aggressive share repurchases,” he said. “Looking under the hood, top-line growth has been fuelled by strong secular tailwinds, including ongoing bouts of innovation leading to market share gains, but more importantly by the application of this innovation to entry level price points leading to substantial expansion of the category itself (i.e., Spark for PWC, Ryker for 3WV, and more recently Switch for the high-growth pontoon industry). BRP is fully committed to electric vehicles (EVs) and expects to offer an electric version of each of its models by the end of 2026, but as soon as 2022 for some units. More recently, triggered by the pandemic, powersports saw a cohort of new entrants attracted to the socially distanced leisurely nature of the industry.”
In a research report titled Engineered for Outperformance, Mr. Doumet expects a “healthy amount” of growth over the next two years, driven by product restocking after dealership inventories dropped by almost 75 per cent from 2019 levels. He estimates it could lead to a multi-year replenishment revenue opportunity of $750-million to $1-billion, representing approximately 10 per cent of fiscal 2023 revenues).
“As such, for F2023 and F2024, we forecast above-average revenue growth, with a CAGR of 14 per cent (versus 9 per cent from F2015 to F2021),” the analyst said. “However, given ongoing (although improving) supply chain challenges, labour constraints, and persistently higher input costs, we expect adjusted EBITDA growth to moderate (i.e., for margins to compress). With BRP’s valuation multiple below its historical average, we believe this has been priced in.”
Mr. Doumet said BRP has established itself as both an “innovator” in the sector as well as “steward of capital,” having reduced its outstanding shares by 25 per cent since 2014 and by returning almost $1-billion to investors through substantial issuer bids since 2017.
“Supported by strong earnings growth and healthy free cash flow (FCF) conversion, BRP was also able to reduce its leverage by almost half and is projected to exit this year at 1.4 times (and next year at 1.0 times),” he said. “With a comfort zone closer to 2 times, this leaves capacity to continue aggressive buyback activity and/or pursue strategic M&A.”
Calling its current discount to peers “unjustified,” Mr. Doumet set a target of $127 per share. The average on the Street is $136.21.
“We apply a 7.5 times EV/EBITDA multiple to our F2024 estimates to derive our one-year target price of $127.00 per share,” he said. “This is largely in line with Polaris’ trading multiple and at a premium to the company’s current trading multiple. We believe this valuation is justified given BRP’s stronger growth outlook and similar balance sheet capacity. That said, we note that BRP’s FCF profile is weaker than its peers but we expect significant improvements over the next two years that should bring it closer in line.”