CIBC: neutral at 69$Note from LB1: We can agree or disagree but this analyst express exactly why the SP is down. We could like the RBC or Desjardins's at 100$ but the folowing text is more representative of the current market sentiment. I think that he is right for the next weeks but wrong for the longer term.
Doing The Right Things While The Cycle Is Normalizing
Our Conclusion
While BBD posted healthy Q1 results, its share price is down 5% on concerns over a normalizing business aviation cycle after an extremely strong 2021/22. While business jet fundamentals remain healthy, the macro setup has become more challenging for pure-play cyclicals as the economic backdrop has become more uncertain and supply/demand trends come off their peaks. On the back of BBD’s Q1 results, our estimates are generally unchanged, and we maintain our Neutral rating and C$69 price target.
Key Points
Doing The Right Things: BBD’s Q1 results and recent Investor Day highlight the company is pulling the right levers as it looks to rebuild its foundation. Just a month ago, the company raised its 2025 targets and reiterated its 2023 outlook. Some of key KPIs we will be watching out for when BBD reports earnings are around its revenue diversification, margins and liquidity position. On the first point, BBD is making a conscious effort to grow its services and defense revenue. Service revenue came in at $424MM in Q1/23, and if annualized, is already on track to hit its 2023 target of $1.6B- $1.7B despite our view that the first quarter would be a seasonally lower period. We continue to see BBD reaping the benefits from the investments it has made in its service centres. On margins, with service revenue becoming an increasing contributor to earnings, EBIT margins in Q1/23 were 9.6% versus 7.8% in Q4/22, which is impressive considering it delivered fewer aircraft. Lastly, on its liquidity position, BBD continued its deleveraging effort, having paid down ~$400MM of debt in the quarter. BBD continues to make solid progress towards its 2025 targets.
Share Price Under Pressure With Concerns On Business Jet Cycle Normalizing: While Q1 results were solid, BBD’s share price came under pressure, and we chalk this up to signs of the business jet cycle normalizing. While the business jet market fundamentals remain healthy, a number of business jet KPIs are coming off their peaks. Looking at RadarBox flight activity data, business jet traffic in April is down ~5% Y/Y while March was down ~3% Y/Y and February flat Y/Y. IADA (International Aircraft Dealers Associate) noted that preowned business aircraft dealers expect tighter conditions in 2023 amid slightly higher inventory levels and a return to more rational pricing and valuations. Used jet inventory in Q1/23 remained at historically low levels of ~5%, however this is up from ~3% last year. We also saw BBD’s unit book-to-bill ratio come down to 0.9x at the end of the quarter versus as high as 2.5x in Q1/22, and Gulfstream post a book-to-bill ratio in Q1/23 of 0.91x.
Model Update: We have adjusted our estimates to incorporate the company’s comments on FCF usage given the need to build up inventory in preparation for delivery that’s skewed towards H2/23. Our 2023E, 2024E, and 2025E EBITDA estimates go to $1.158B (from $1.156B), $1.422B (from $1.420B), and $1.641B, respectively.