CIBC: Target at 69$ (from 65$)Note from LB1; A very conservative approach but I think interesting the reasons expressed by the analyst: the anormally low capex forecast (highlighted).
Key Takeaways From The 2023 Investor Day
Our Conclusion
As BBD passes the midpoint of its 5-year plan, it is ahead of schedule and
has put in place a solid foundation to grow from. While BBD did raise its 2025
targets, the key takeaway for us was that the tone of this investor day had
shifted away from focusing on “fixing” the business to “growing” the business.
BBD has laid the groundwork for additional growth opportunities looking past
2025 to create a more predictable business model. That said, with the
updated outlook provided by BBD generally in line with our expectations, and
with FCF coming in ahead primarily due to capex, we keep our Neutral
rating. Price target goes from C$65 to C$69.
Key Points
Transitioning From Restructuring To Growth:
As BBD passes the
midpoint of its 5-year plan, it is ahead of schedule and has put in place a
solid foundation to grow from. One of the main takeaways we had from the
investor day was the increased granularity on its growth opportunities looking
past 2025. First, BBD has a good level of visibility on hitting its 2025 revenue
and EBITDA targets, given its backlog extends out 18-24 months (sits at
$14.8B), and it has good traction on growing its service revenue to $2B by
2025. BBD’s market outlook sees industry revenue growing from $18B to
$23.5B from 2022 to 2025 with medium and large business jet revenue set to
expand (light jets down). Given BBD’s focus on the medium and large jet
segment, this is a tailwind for the company. Second, BBD provided increased
colour on its defense growth plans and sees a path to generating over $1B in
revenue post-2025 (triple current levels) with a 10-year forecast demand
(2023-2032) for ~375 aircraft. Third, BBD is focusing on growing its certified
pre-owned revenue and is currently focused on operationalizing this
business. It is managing about a dozen planes now but sees a path to
scaling this up. Net-net, the long-term revenue opportunities highlight the
continued upside benefitting BBD looking past 2025 while the additional
revenue levers provide some countercyclical balance to its manufacturing
segment.
Deleveraging Path – Line Of Sight To The End Target:
BBD is targeting a net leverage ratio of 2.0x-2.5x by 2025, though we believe this could prove to
be conservative if the company allocates additional capital toward paying
down debt versus growth investments. The company views this leverage
ratio as approaching investment-grade levels, which in turn improves its
liquidity requirements. Two years ago BBD needed ~$2B in minimum
liquidity; this moved to ~$1.5B in 2022 and BBD is targeting $1.0B-$1.5B in
2025. As well, BBD’s debt maturity runway is 18-24 months and it is
successfully creating a more flexible debt maturity stack to reduce the risk of
balloon payments. This has been one of the key successes in BBD’s
transformation: transforming its balance sheet to provide the company with
sufficient flexibility to manage through the business jet cycle.
2025 FCF Target Higher But Maybe A Function Of Capex Timing:
BBD’s shares have
responded positively to the updated 2025 targets, and we view the big increase in FCF as the
key driver. That said, we view the $400MM increase in FCF as primarily being driven by
change in BBD’s 2025 capex guidance, which moved from $600MM to $200MM-$300MM. In
2022, BBD was guiding to $1.5B in EBITDA in 2025, $400MM-$500MM in interest and
$600MM in capex to get to ~$500MM in FCF. The updated outlook has EBITDA at $1.625B
but capex is now $200MM-$300MM and interest expense another $300MM-$400MM
headwind, which produces a >$900MM FCF print. We had 2025 FCF at $625MM but
$600MM in capex, as we had already accounted for the higher EBITDA and lower interest
charge based on business trends exiting 2022. As such, we view the step up in FCF as
primarily a capex timing issue.
This does not take away from the much improved FCF story at BBD, which has allowed the
company to accelerate its deleveraging efforts, with BBD’s share price benefitting from the
debt to equity shift within its enterprise value. Also, we acknowledge that BBD does get to
benefit from a capex holiday here given the intensity of its last investment cycle as it
launched the Global 7500. Nonetheless, we do believe that BBD’s cycle-average capex will
be higher than the current run rate. We continue to view D&A as a good proxy for normalized
capex, which should be ~$500MM in 2025. We expect BBD’s capex will track below D&A
from 2020 out to at least 2025. In other words, we don’t view the 2025 FCF target as truly
representative of the cycle-average capital intensity of the business.