Nat bank upgrade Q2 2024 preview
Maintain Outperform; target increased to C$114.00
We maintain our Outperform rating on Bombardier shares ahead of Q2 results.
We tweaked our estimates based on a richer delivery mix for Q2 but have
made only minor adjustments to our full-year forecasts. With our growing
confidence that Bombardier can generate solid FCF over a multi-year period,
we are also increasing our EV/EBITDA valuation multiple to 7.5x (versus
6.5x previously). As a result, our target moves to C$114.00 from C$92.00
previously.
Flying activity stable
According to business aviation data provider WingX, global business jet flying
activity in the first half of 2024 is down ~2% compared to H1/23 but remains
well ahead of 2019 levels. While flying activity in the U.S. so far this year,
based on data from the FAA, is roughly on par with last year, WingX reports
that activity in the U.S. for super midsize (Bombardier Challenger models) and
ultra long-range (Bombardier Global models) jets is considerably stronger than
other categories.
Some recent successes in the Defense segment
Bombardier is targeting to grow its high-margin Defense segment revenue
by at least 3x to ~$1.0 billion by 2030 and the company has had some recent
success that supports growth. Indeed, in late June, Finland selected Sierra
Nevada (SNC) as the supplier of two new aerial surveillance aircraft that will
be delivered in 2026-27 (aircraft platform will be Bombardier's Challenger 650)
while Sweden exercised an option for a third GlobalEye airborne early warning
aircraft (GlobalEye aircraft platform is Bombardier's Global 6000).
Free cash flow in coming years supports shareholder returns
Bombardier expects to generate $900 million in free cash flow in 2025, which
is likely to be a sustainable level of annual FCF given that the company does
not need to develop an all-new jet platform until 2030 or beyond. Assuming
aftermarket and Defense revenue grows, FCF should also grow through the
2030 timeframe. As such, once targeted leverage is reached (2.0-2.5x in
2025), the company can consider other capital deployment options including
dividends, share buybacks and possibly M&A.