Bombardier Inc. T.BBD.A

Scotiabank Report

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Strong Backlog Reduces the Need for Crystal Ball on 2024

OUR TAKE: Positive. Despite rising concerns about bizjet cycle, BBD managed to maintain the backlog, book:bill ratio and guidance, while turning around the FCF and beating earnings expectations for the 11th consecutive quarter. The pure-play bizjet OEM is not immune to industry normalization or persistent supply chain challenges, but it has been able to deliver better than peers and expectations due to its impressive management of backlog, production and supply chain. The company noted strong order pipeline and clear line of sight on delivery ramp-up heading into Q4, which points to a solid end to 2023 with a remarkable improvement in the leverage ratio, excess liquidity for more deleveraging and prospects for further growth in 2024. We maintain our annual forecasts while slightly raising our target to C$85 (was C$84) on better-than-expected net debt trends. We also re-iterate our Sector Outperform rating given the stock is attractively trading at only 5.8x EV/EBITDA on 2024E, significantly below its key comps at ~11x (albeit some discount is warranted).

KEY POINTS

Q4 to build on strong momentum. Q3 FCF rebounded to $80M (+54% y/y) from a cash burn of >$200M in each of the prior two quarters despite a sequential increase in capex (mostly for Toronto facility). While earnings ramped up on higher deliveries (+6 y/y) and aftermarket revenue (+11% y/y), working capital improved as book:bill ratio / backlog remained steady at 1.1x / $14.7B and the intensity of inventory build reduced (see our first take). Net debt slightly declined q/q as the leverage ratio further improved to 4.1x from 4.5x q/q and 5.5x y/y. Management reaffirmed 2023 guidance, including particularly >$250M FCF and ~1.0x book:bill ratio, given its visibility on >56 deliveries in Q4 and order pipeline across bizjet and defense. YTD, BBD has already realized 70%-75% of full-year earnings target with ~60% of planned deliveries, which gives us confidence in Q4 outlook. Specifically, it requires $353M EBITDA, $174M EBIT and $639M FCF in Q4 (vs. last year’s $352M, $211M and $169M, respectively) to meet the low end of guidance. We are above these implied minimum Q4 targets. BBD would be able to attain ~1.0x book:bill ratio in 2023 even with a sub-1.0x in Q4.

Positive 2024 outlook. Management intends to provide 2024 guidance with Q4 earnings, although it is expecting higher deliveries and positive FCF, supported by the current backlog (18-24 months across all platforms), potential orders (mainly fleet and defense) and continued strong aftermarket growth (utilizing capacity expansion to gain market share). The company noted that fleet operators (key driver of orders) are not facing any financing difficulties in the current rate environment. In addition, no RVG payments, completion of the Toronto plant, and additional interest cost savings should serve as FCF tailwinds. We forecast 142 deliveries, $8.2B revenue, $1.3B EBITDA, $870M EBIT and $450M FCF in 2024E, which may prove conservative. We reiterate that our analysis of key FCF drivers suggests a possible 2024 FCF range of $450M to $700M, subject to working capital. Our estimates imply a leverage ratio of 2.9x by end-2024E, down from 3.5x at end-2023E and 4.6x at end-2022. We think BBD could use excess liquidity to pay down more debt in 2024.

• Quarterly Financials
• Yearly Financials

Historical price multiple calculations use FYE prices. All values in US$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Qtly FCF (M)	Q1	Q2	Q3	Q4	Year	FCF Yield
2022A	$173	$341	$52	$169	$735	20.0%
2023E	$-247A	$-222A	$80A	$655	$266	8.4%
2024E	$-198	$-143	$208	$583	$450	14.5%
2025E	$-104	$-28	$292	$664	$825	26.6%

Exhibit 1 - Q3 Recap: FCF turns positive while EBITDA and EBIT continue to beat Street expectations

Source: Company reports; FactSet; Visible Alpha; Scotiabank GBM estimates.

 

Exhibit 2 - Revised Estimates – largely maintaining our annual forecasts

* Net debt doesn't reflect lease liabilities, pension liabilities, other financial liabilities, and restricted cash.

Source: Scotiabank GBM estimates.

 

Exhibit 3 - Bombardier Inc. – Financial Estimate Summary

* Net debt doesn't reflect lease liabilities, pension liabilities, other financial liabilities, and restricted cash (until 2022).
** Operating cash flows, capex and FCF adjusted for discontinued operations.
Note: Unless noted otherwise, comparable 2020 and 2019 financials may include results for discontinued operations (train, commercial aircraft, and aerostructures).

Source: Company reports; Scotiabank GBM estimates.