Bombardier Inc. T.BBD.A

Scotiabank - Strong Growth Execution to Start 2023, FCF More

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Strong Growth Execution to Start 2023, FCF More 2H Skewed

OUR TAKE: Slight Positive. BBD reported yet another strong quarter in terms of top-line and bottom-line growth while backlog and book:bill ratio remained steady as demand and pricing are holding up well. However, FCF didn’t impress this time given production seasonality and timing/magnitude of certain cash flows. Management’s near-term outlook and unchanged guidance suggest FCF could remain weak in Q2 before rebounding to potentially >$600M in 2H. Leverage ratio remained steady q/q but should improve substantially by year-end, marching toward BBD’s 2025 target of 2.0x-2.5x. We remain positive with our Sector Outperform rating while raising our target to C$84 (was C$83) on our slightly improved net debt estimate. Stock remains attractive at 6.9x EV/EBITDA on our 2024E, close to its pre-pandemic trough of 6.0x, a steep discount to U.S. comps at 10x.

KEY POINTS

Strong start to 2023. Deliveries (ex-Learjet), revenue, EBITDA and EBIT grew 22%, 17%, 27% and 89% y/y, exceeding full-year guidance of at least 16%, 10%, 21% and 36%, respectively, while beating expectations (Exhibit 1). This was despite likely fewer deliveries of highest-priced Global 7500, in our view. EBITDA margin was roughly in line with full-year guidance and expectations, while EBIT margin was ahead due to lower amortization, supporting our view on delivery mix. Aftermarket revenue reached a new record of $424M (+17% y/y), driven by recent capacity growth, pricing gains and customer recapture. FCF of -$247M vs. +$173M last year missed our -$90M estimate and -$177M consensus, reflecting a working capital drag of $494M. BBD called out inventory build ($479M) to support higher production and annual incentive payment, partially offset by higher payables and customer progress payments. Backlog was flat q/q at $14.8B (+10% y/y) as book:bill ratio remained steady at 0.9x from 0.8x in Q4 (close to BBD’s ~1x plan) while lapping a tough comp (2.5x in Q1/22). Order activity was negatively impacted by a short-lived regional banking crisis in March.

Intact guidance implies greater Q4 skew. BBD maintained full-year guidance, which was issued in February 2023. However, based on Q1 results and the company’s Q2 outlook, it appears that deliveries and FCF could be even more skewed to Q4 than we previously thought. BBD expects deliveries to be flattish y/y in Q2 and more skewed to Q4, implying potentially >55 in Q4 vs. 49 last year and 22 in Q1. Further, it expects to make a $105M RVG payment (out of total $125M this year) and to build more inventory in Q2. In addition, we think capex could potentially increase q/q as the new Toronto facility nears completion in 2H while interest payments are typically more skewed to Q2 and Q4. Against that backdrop, we now expect FCF to remain negative in Q2 at -$128M before rebounding in Q3 and peaking in Q4. We remain comfortable in our largely intact annual forecasts as BBD noted stickiness in demand and pricing despite recent industry observations about slowing flying activity (albeit APAC picking up) and modestly rebounding pre-owned inventory at 5% vs. 3% last year (inventory of BBD jets remains low).