RBC: May 15 presentation Report by RBC analyst:
Note by Tempo1: Nothing new, the reason for the yesterday's surge is not here.
Highlights from the RBC Canadian Industrials Conference
This afternoon, ric Martel, Chief Executive Officer, presented during day two of RBC's Canadian Industrials Conference.
Business jet demand trends
We asked management about the demand environment, where they noted several indicators of demand strength for its products. Key was that demand was not stemming from one source but was broad-based across different segments, geographies, and customer types. Management highlighted that the pandemic and growth in wealth creation have resulted in solid order demand and increased fleet customers, noting a 57% increase in fleet hours vs 2019. Key is that fleet operators are big customers for midsize and large cabin business jets (20% of sales) and run at higher utilization vs individual owners, which translates into increased service revenues. Further, the company noted strong growth in the Middle East, specifically in large jets, and that European demand is rebounding. In addition, management said APAC activity is up on wealth moving to Singapore and that India presents an exciting opportunity, with a strong HNW buyer base but still lacks adequate infrastructure, a potential services expansion zone, in our view.
Growth opportunities post 2025
Aftermarket Services. Our conversation highlighted the current success and potential for outsized growth in the Aftermarket Services segment. Management highlighted that it increased the services market share from 36% in 2020 to 46% in 2023. The company highlighted it is on track to reach 2025 aftermarket revenue guidance of $2B by 2024, one year earlier than planned. In addition, management pointed to mid- to high single-digit revenue CAGR out to 2030, driven by a growing installed base, a mixed shift to larger jets, and potential M&A.
Defense.
Key from the talk was commentary from management on the potential of its Defense segment. At the company's recent investor day they communicated the goal of reaching $1B to $1.5B in revenues by 2030, an increase from prior indications of $1B. Management noted past success in the US BACN and the recent HADES program, which lend credence to the company's defense product offering and opens the doors for other NATO countries to purchase their ISR solutions. Given that defense margins are above the company's average margins, we view this as a key positive and see demand tailwinds given geopolitical uncertainty and increased defense pending.
Certified Pre-Owned.
One significant advantage of having an established aftermarket presence is the opportunity for growth in the pre-owned market. We believe there are opportunities for the company to gain market share in this area, which third party providers currently control. This can be achieved through three key strategies: becoming the leading provider of certified pre-owned, expanding its services into brokerages, and entering into resale agreements with customers to manage their vehicle inventory. By executing these plans, the company can capitalize on untapped potential and strengthen its position in the industry, in our view.
Capital Allocation
Management outlined their capital allocation framework post 2025 with a focus on higher ROIC investments in product upgrades/ derivatives (such as the 3500 and 8000) compared to a new clean sheet, which would be a significant investment and increase execution risk in our view. The company expects to drive growth through M&A to expand services and beef up the defense offering. Finally, management is considering further debt reduction, but is focused on shareholder returns in the forms of share buybacks or a dividend, which we view as appropriate given the repaired balance sheet and robust demand outlook.