CIBC: Less sceptic than beforeNote from Tempo 1 : CIBC was sceptic about the large investment needed for a new program soon. His target was 61$. My expectation is that he will upgrade again his target after the investor day.
Continuing To De-risk The Operations
Our Conclusion
BBD’s Q1 results highlight the success the company is having in de-risking
its operations as it continues to build a wider liquidity and margin buffer. Our
price target moves from C$61 to C$67 and we keep our Neutral rating.
Key Points
BBD’s Q1 results continue to highlight the success the company is having in
de-risking its operations. The concern we often hear from investors is how
BBD will perform through the cycle, recognizing business jet fundamentals
are healthy today. BBD continues to take steps to widen the liquidity and
margin buffer.
On the liquidity front, BBD exited Q1 with pro forma liquidity of $1.42B, which
is at the high end of its targeted range of $1.0B-$1.5B. Net leverage at the
end of the quarter was 3.6x. The company also continues to make progress
on debt reduction, with $100MM of debt redemption closed on April 15. BBD
also successfully completed the issuance of $750MM of Senior Notes due
2031, the proceeds of which will be used to repay existing outstanding debts.
This effectively pushes out maturities and further strengthens the balance
sheet. BBD is targeting a leverage ratio of 2.0x-2.5x in 2025.
On the margin front, BBD printed 16% EBITDA margin in Q1, up 141 bps Y/Y
and versus 9.2% back in Q1/21. The company noted Aftermarket Services
in Q1 grew 13% Y/Y to $477MM and contributed 37% of total revenue.
Growth in Aftermarket revenue, combined with healthy jet sales prices and
cost management, drove the margin expansion we saw in the quarter. This
highlights the revenue diversification strategy at BBD, which improves mix
but also should help reduce the cyclicality in margins.
The backlog also provides BBD with significant visibility. At the end of the
quarter, the backlog stood at $14.9B and this equates to more than two
years of revenue. Recent trends also point to demand remaining healthy. In
Q1, book to bill was 1.6x, which is up significantly from 1.0x exiting 2023,
and the backlog was up $700MM Q/Q.
Heading to BBD’s Investor Day next week, we expect more colour on the
company’s longer-term capital allocation plans and margin upside post-2025.
On the former, we think BBD will look to alleviate concerns that it will need to
enter into a new capex cycle heading into the back half of this decade to fund
a new mid-size aircraft, which is supportive of cumulative FCF generation.
The Challenger continues to sell well, so there isn’t any urgency to replace
this model. We also expect more colour on the growth and expansion of
Aftermarket Service, which has been a lift on margins, and potential growth
opportunities within Defense. Recall that BBD’s 2025 target is to reach $2B
of revenue in Aftermarket, and the company thinks Defense could reach $1B
within the next five years.