Bombardier Inc. T.BBD.A

Scotiabank up to 90. Sees a future valuation from 170-285

[NoNameAtAll]

IR Day 2024: A Much Different 5-Year Game Plan

OUR TAKE: Positive. We found this year’s investor day quite different from the prior ones as it was more about margin-accretive growth through 2030 that is not dependent on deliveries and contemplates ROIC-accretive investment opportunities while preserving liquidity. Clearly, the story has changed significantly since the current management team came aboard in 2020, with FCF approaching $1.0B (high-teen yield) and leverage ratio nearing an investment grade rating. This is not the same BBD that many investors would remember from the 2000’s and 2010’s. Today’s BBD is a stable, high-margin and FCF-generating business that is ready to show resilience through cycles and even reward shareholders with buybacks or dividends. The event boosted our confidence in margin and FCF outlook, which drives our target up to C$90 (was C$83). If management can drive the business toward its full 2030 potential, we could envision a fair future valuation of C$170 to C$285 (Exhibit 13) depending on top-line growth and margin, before any accretion from potential buybacks. In a steady state, we think BBD could potentially accumulate at least $4.0B-$5.0B in dry powder over 2026-2030 to explore capital deployment opportunities. We re-iterate our SO rating.

KEY POINTS

A different path to 2030 but same disciplined approach. BBD maintained its 2025 objectives while moving the aftermarket revenue goal of $2.0B up by one year. We are not disappointed by unchanged 2025 targets but rather think that management is being prudent and disciplined in assuming ~150 deliveries per year in 2025 and beyond vs. 2024 guidance of 150-155. The company did not provide financial targets for outer years but what piqued our interest the most was management’s ambition to generate ~50% of total revenue from higher-margin streams (aftermarket, defense, and pre-owned) by 2030 vs. 31% in 2023. This suggests to us that these three lines, together, have potential to grow at high single-digit to double-digit CAGRs vs. 2023. However, this doesn’t necessarily mean that OEM revenue (i.e., bizjet deliveries) won’t grow - it all depends on market conditions. By comparison, OEM revenue was a bigger contributor to total revenue growth (in dollars) between 2020 and 2023. Please see inside for our key takeaways on segments and capital allocation.

Significant FCF potential in 2030. Based on our math, we see potential for $10B-$13B revenue in 2030 and margin expansion to up to 19%-20%, depending on the growth in higher-margin streams. In a steady state (i.e., flat cash interest and capex vs. 2025 + neutral working capital and cash taxes), potential EBITDA in 2030 could convert into a more solid FCF generation of $1.1B-$1.8B, before any growth investments of course. Most importantly, we believe BBD’s EV/EBITDA multiple could expand as less-cyclical businesses account for a bigger portion of revenue. We would view 8.0x as a fair multiple, assuming 10x for higher-margin streams and 6.0x for OEM. For context, major aftermarket comps (AAR, Triumph and ST Engineering) are trading at 10.8x on average, while AAR recently acquired Triumph’s product support business for 11x (including synergies but excluding tax benefits).

• 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
2023A	$-247	$-222	$80	$646	$257	6.8%
2024E	$-387A	$-236	$104	$770	$250	5.1%
2025E	$-106	$90	$172	$645	$800	16.5%
2026E	$-86	$119	$199	$667	$900	18.5%

OEM (bizjet manufacturing). Management has based its long-term business plan on flat ~150 deliveries per year from 2025 onward and flat ~1.0x book:bill ratio, although the company has capacity to build more than 150 jets in a year. The backlog is strong across the four platforms (Global 7500/8000, Global 6500/5500, Challenger 650 and Challenger 3500) with 18-24 months of visibility. However, BBD intends to remain disciplined by not raising production rates too much or too fast in light of macro uncertainties, geopolitical conflicts and supply chain disruptions (mostly engine suppliers). Pricing is expected to remain a tailwind through 2025, net of cost inflation, as demand is strong (cancellations are rare these days), industry is disciplined, and pre-owned market is tight (5.8% for large jets and 7.1% for medium jets). Management pointed out that strong backlog, good production discipline and exit from the light-cabin market have improved the company’s resilience over the years. BBD’s strategy to exit the light-cabin segment is fully supported by industry forecasts of stronger growth in the medium/large segments. Fleet operators, which now account for ~20% of BBD’s deliveries, have been driving the OEM business over the past few years as some high-value commercial aviation passengers have switched to private aviation for good. The ultra high-net worth individual (UHNWI) population has also grown nicely at 6% CAGR since 2019, which has also been driving demand. The company is unfazed by primary competitors’ new product offerings (e.g., G700 and the much delayed Falcon 10x), noting continued solid customer interest in all BBD models, including Challenger 650. Management seems more inclined to invest in derivatives or refreshes as opposed to a clean sheet design through 2030.

Exhibit 1 - Strong backlog supports resilience in annual bizjet deliveries

Source: Company presentation.

Exhibit 2 - Medium-cabin and large-cabin segments are projected to drive growth in OEM industry revenues

Source: Company presentation.

 

Aftermarket services. After doubling this segment’s revenue since 2020 to ~$2.0B this year (raised guidance), BBD sees potential for further doubling it by 2030. It is expecting potential revenue upside to a range of $2.8B-$3.9B (at 50%-70% market share) by 2030, assuming a mid-to-high single-digit CAGR, which we estimate would represent 27%-30% of total potential revenue vs. 22% in 2023. The key drivers have been and are expected to be growing installed base (currently ~5,100 BBD jets), improving mix (BBD is producing medium/large jets while lighter jets are retiring), capacity expansion (BBD added ~1M sq. ft. globally to now have ~3M sq. ft. footprint), aging of in-service fleet, and enhanced service offerings. BBD is now capturing nearly 50% of the market, up from 36% in 2020. In addition, we believe pricing has been strong lately (due to supply chain constraints), while fleet operators are driving an acceleration in aftermarket demand with their 57% growth in flight hours on BBD jets vs. 2019. A typical fleet operator would fly more than 1,000 hours in a year vs. 250 hours for other customers.

Exhibit 3 - BBD sees potential for further doubling of aftermarket services revenue by 2030

Source: Company presentation.

Exhibit 4 - Growing installed base of BBD jets is a key driver of aftermarket services revenue

Source: Company presentation.

Exhibit 5 - Stronger growth in fleet operators’ flight hours is driving an acceleration in aftermarket services demand

Source: Company presentation.

 

Defense. BBD has made good progress so far on its prior target of ~$1.0B in defense revenue by the second half of this decade. It now sees potential for $1.0B-$1.5B revenue by 2030, up from our estimated ~$400M in 2023, noting an addressable market of ~375 aircraft worth $25B-$40B (including modifications but excluding aftermarket) between 2023 and 2032. The new revenue target would represent 10%-12% of total potential revenue in 2030 vs. 5% in 2023, in our estimation. The company’s defense strategy follows a high ROIC framework wherein it leverages existing bizjet platforms such as Global 6500. Management noted strong appetite for its unique solutions with defense mission capability being the main customer focus, citing recent contract wins such as the U.S. Army’s HADES program (requires at least one prototype aircraft, potentially several jets over time), while competition is low for now. Ongoing geopolitical conflicts are also giving rise to demand.

Exhibit 6 - BBD is bullish on defense growth opportunities

Source: Company presentation.

 

Pre-owned aircraft. The company sees potential for $0.5B-$1.0B revenue from pre-owned aircraft sales by 2030, up from our estimated ~$300M in 2023, which we believe would represent 5%-8% of total potential revenue vs. 4% in 2023. BBD is likely penetrating <10% of the market today but has potential to increase that to ~16% over time, aided by its certified pre-owned offering (launched in 2021). It estimates the addressable market at $6.3B by 2030 vs. $3.8B in 2023. Currently, about 250 pre-owned aircraft transactions take place annually. Management also expects pre-owned aircraft customers to eventually drive more aftermarket revenue.

Exhibit 7 - Pre-owned aircraft market offers another attractive avenue for long-term growth

Source: Company presentation.

 

Capital allocation. Management sounded more comfortable this time in terms of exploring ROIC-accretive capital deployment opportunities over time as balance sheet is tracking well toward its leverage ratio target of 2.0x-2.5x (we forecast 2.0x in 2025 and 1.4x in 2026). With the targeted FCF generation of at least $900M/year from 2025 onward (potentially growing over time with net earnings), assuming ~$300M annual operating capex, the company is open to considering M&A, partnerships, product upgrades, and shareholder returns, on top of its ongoing focus on deleveraging. It highlighted strong ROIC track record whether it is product refreshes (e.g., Global 8000 and Challenger 3500), aftermarket expansion (leasing model) or defense growth. High ROIC is the main rationale for going after derivatives vs. clean sheet design as the former cost hundreds of millions of dollars per program as opposed to billions for the latter. We believe M&A could potentially be focused on aftermarket services, defense or even OEM supply chain, while partnerships (e.g., joint ventures) could be more suitable for pursuing defense opportunities. BBD is also looking to leverage its significant tax shield worth ~$12B, which would support solid FCF generation for years to come.

Exhibit 8 - Management remains focused on pursuing high-ROIC growth opportunities

Source: Company presentation.

 

Balance sheet. BBD remains focused on achieving an investment grade credit rating over time as the leverage ratio continues to come down (currently 3.6x). After reducing long-term debt by $4.6B since 2020 (including $100M in April 2024), management is aiming to pay down more debt as liquidity remains quite sufficient and is expected to increase with FCF generation. On top of saving annual interest cost by ~$340M since 2020, the company intends to reduce it further by $30M-$70M over the next 18 months (implying further $400M-$1.0B debt reduction by 2025). We believe it will target the next maturity (June 2026) as well as some 2027 debt in the coming months.

Exhibit 9 - Deleveraging is tracking right on BBD’s target

Source: Company presentation.

Exhibit 10 - Debt maturity profile is more manageable than before but still has room for improvement

Source: Company presentation.

 

Exhibit 11 - Revised Estimates – slightly raising margin and FCF outlook on increased confidence in BBD’s ability to execute

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

Source: Scotiabank GBM estimates.

 

Exhibit 12 - 2030 revenue potential from higher-margin streams

* Low-end of range assumes 50% market share while top-end is based on 70%.
Note: Implied total revenue includes our assumed OEM revenue (not shown here), aftermarket revenue, defense revenue, and pre-owned revenue.

Source: Company reports; Scotiabank GBM estimates.

 

Exhibit 13 - BBD’s 2030 revenue potential represents significant upside risk in the share price

* Cumulative 2027-2030 FCF is based on our revenue growth and margin assumptions, $300M operating capex, $350M cash interest, neutral working capital and cash taxes, and our growth investment assumptions ($500M/year under Low column and $300M/year under High column).

Source: Scotiabank GBM estimates.

 

Exhibit 14 - Bombardier Inc. – Financial Estimate Summary

Note: Net debt doesn't reflect lease liabilities, pension liabilities, and other financial liabilities.

Source: Company reports; Scotiabank GBM estimates.

Company Overview

Company Description

Headquartered in Montreal, Quebec, Canada, Bombardier is one of the largest manufacturers of business jets in the world, ranging from mid-size and super mid-size jets to large-cabin and long-range jets. The company has operations in more than 12 countries, including production and engineering sites and a growing customer service network across the U.S., Europe and Asia-Pacific. Bombardier has a worldwide fleet of more than 5,000 business jets in service with a wide variety of multinational corporations, charter and fractional ownership providers, governments, and private individuals. The company is also growing its defense business, leveraging its existing business jet platforms.

Investment Thesis

We like Bombardier as a growth, margin expansion and deleveraging story against a positive backdrop of strong bizjet demand and low pre-owned inventory levels. Now in its fifth year almost, the current management team has executed better than expected across all KPIs, particularly deleveraging, which is tracking well ahead of the original plan. We believe the company is much better positioned in this cycle than prior downturns with no exposure to macro-sensitive small-cabin bizjets, growing higher-margin revenue streams (aftermarket, defense, and pre-owned), solid backlog of higher quality orders, significantly improved FCF power, highly disciplined capital allocation strategy, stronger balance sheet, and no debt maturity until June 2026.

Key Risks

Global economic recession, geopolitical conflicts, decline in corporate profits or high net-worth individuals, significant rebound in pre-owned inventory, increase in competition, key executive turnover.