Q4/F24; MARGINS EXCEED PRE-PANDEMIC WITH MORE TO COME
THE TD COWEN INSIGHT
Heroux-Devtek reported Q4/F24 adjusted EBITDA of $33.1 million, compared to our forecast/consensus of $28.2/$26.3 million. Diluted EPS of $0.49 compared to our forecast/ consensus of $0.33/$0.31. Strong Q4/F24 margins and a growing realization by the equity market that margins will likely exceed historical peak quicker-than-previously expected should drive shares higher, in our view.
Impact: POSITIVE
We are maintaining our BUY recommendation and increasing our target to $28.00
from $23.00. Our target increase reflects higher forecast EBITDA and EPS due to the carryforward of a portion of the stronger-than-forecast Q4/F24 Civil revenue and consolidated margin. Our outlook for stronger gross margin without a corresponding increase in D&A and/or interest drives significantly higher EPS estimates. In our view, Heroux-Devtek has always been viewed (correctly) by the equity market as a very
strong aerospace supplier. This has resulted in few periods of sentiment driven multiple compression. Regardless, we think the outlook for strong organic growth driven by both revenue and relatively low-risk margin expansion, combined with our expectation for excess capital in coming years (total debt-EBITDA below 2x by end of F2025), could bias its valuation (and our target) multiples higher in the coming years.
Heroux-Devtek reported impressive Q4/F24 results with EBITDA margin reaching 18.0% compared to its pre-pandemic (Q4/F19) margin of 16.4%. Civil revenue strength, pricing initiatives, and production efficiencies continue to be the driver of margin expansion. Based on past capacity investments, including that related to the 777 program, we believe the company can increase production throughput without the need for deploying incremental capital above (the very manageable in our view) 4-5% of revenue indicated by management. This combined with strong anticipated earning growth driven by 777 production (TD assumes 777 rate increases at 30% CAGR 2024-2026), ramp-up in other civil programs, and the increasing revenue from recently awarded new business jet and defence platforms, provides a compelling multi-year FCF outlook for the company, in our view.
We forecast CAGRs of 8%, 17%, and 25% in revenue, adjusted EBITDA, and EPS, respectively, from F2024-F2026. This growth profile, combined with an acquisition-minded management team, strong FCF, improving return on capital, and strong cyclical backdrop, are expected to drive Heroux-Devtek shares significantly higher, in our view.