TD: Target at 79$Pre-releases Strong Q4/22 Results; Forecast & Valuation Update
Event
We are adjusting our Bombardier forecasts to reflect the company's disclosure yesterday of preliminary 2022 financial results and recent debt refinancing.
Impact: SLIGHTLY POSITIVE
We are increasing our target price to C$79.00 from C$78.00 and maintaining our SPECULATIVE BUY recommendation. The increase in our target price reflects slightly higher Adjusted EBITDA estimates due to the carry-forward of a portion of the stronger-than-expected Q4/22 results, partially offset by slightly higher forecast net debt. Our long-term view regarding deliveries, cost-saving initiatives, and margin expansion opportunities remain unchanged. Although the extreme undervaluation of 2022 has largely corrected, we still view the current share price and valuation as leaving attractive risk-adjusted upside potential for investors over a 12-month investment horizon.
We forecast that Bombardier's manufacturing revenue will increase at a 2.6% CAGR from 2022-2025, primarily due to a 3.9% CAGR in aircraft deliveries. Two consecutive years of very strong book-to-bill ratios have resulted in a $14.8 billion backlog (approximately 2.5 years of manufacturing revenue) that we believe will insulate the company's revenue and earnings from economic headwinds in 2023. We forecast that services revenue will increase at a 7.6% CAGR from 2022-2025 due to aircraft utilization, global fleet growth, and an increase in the number of Bombardier service centers.
We believe that Bombardier's valuation is attractive at a 14% yield on 2024 forecast FCF and 6.8x on forecast Adjusted EBITDA. Our target multiple of 8.0x represents a 20% discount to its comp-group five-year pre-pandemic average, and does not require any multiple expansion from the current forward multiple of 8.0x. We believe that our target multiple prudently accounts for its financial leverage and its lessdiversified revenue profile relative to comparables, while attributing value to its growth potential, improving credibility, FCF strength, exposure to high-net-worthconsumers and faster-than-anticipated deleveraging.
TD Investment Conclusion
We believe that Bombardier's business aviation franchise is strong and that there is potential for long-term earnings that justify a higher share price. Although financial leverage is high and elevates the risk profile of a standalone business jet company, we believe that risk-adjusted upside justifies acquiring the shares.
NOTE: TD forecast for 2025 is 1 493 M$ for EBITDA and 4,88$ for EPS