TD: From 83$ to 87$Q1/23; Backlog Quality Provides Resilience & Visibility
Event
Bombardier reported Q1/23 Adjusted EBITDA of $212 million, compared to our forecast of $235 million and consensus of $204 million.
Impact: MIXED
We are increasing our target to C$87.00 from C$83.00 and maintaining our BUY recommendation. The increased target is primarily due to the impact of a shift forward of our valuation period by one quarter and slightly lower forecast net debt. Our Adjusted EBITDA forecasts are largely unchanged, with a slight downward bias due to the carry forward of a portion of the weaker-than-forecast Q1/23 margin. Our EPS forecasts have increased due to non-recurring impacts in Q1/23, and the carry forward of the lower-than-forecast depreciation and interest expense.
Bombardier reported mixed results with stronger-than-consensus Adjusted EBITDA, but below our forecast due entirely to lower-than-forecast margin. FCF usage was greater-than-forecast due to working capital investments. It does not concern us given management commentary, the unchanged FCF guidance for the year, and traditional challenges of forecasting quarterly working capital. Q1/23 orders took a temporary pause due to the regional banking crisis, but a book-to-bill of 0.9x was sufficient to provide us with confidence in the cycle and outlook. Sub-1.0x should not be surprising, in our view, given the inevitable normalization and softening in order activity that we believe is underway. Orders have been resilient in North America, softening in Europe and strengthening in Asia-Pacific.
We believe that volume and pricing (net of inflation), service revenue, cost saving initiatives, and pre-owned (CPO) opportunities will continue to drive earnings growth and deleveraging. We believe that Bombardier's backlog provides good earnings visibility through 2024, and although business jet activity is moderating from the unsustainably high levels of H1/22, we view the moderation as constructive for limiting the long-term volatility and health of the cycle. Our target multiple of 8.0x represents a 20% discount to its comp-group five-year pre-pandemic average, and compares with the current forward multiple of approximately 6.9x.
TD Investment Conclusion
We believe that Bombardier's business aviation franchise is strong and that the declining financial leverage, backlog, production plans, and free-cash-flow visibility justify a higher share price
LB1: Sorry, I had to leave yesterday