Optimism by Poirier at DesjardinsFrom Recap of the week : transportation and aerospace oct 16
This week, we take a closer look at BBD ahead of the NBAA (October 22–24 in Las Vegas) and its 3Q results (on November 7), and following the stock’s 109.3% ytd rally (vs 21.9% for the S&P 500). At 3.5x leverage and a beta of 2.03, and given the bizjet industry’s reliance on financing, BBD shares have been a prime beneficiary of the pivot to an interest rate-cutting environment, easing access to capital and more risk-on capital markets sentiment (see our interest rate sensitivity analysis). Moreover, BBD’s bonds issued in June at a 7.0% coupon are now trading at a YTM of only 6.5%. The speculative bonds of fleet operator customer VistaJet, which traded as high as 14% in July, are now down to 10.3%. However, BBD is far from just a macro/factor rotation play, as the fundamentals of its bizjet business and end markets remain healthy. Although bizjet activity in the US has fluttered in recent weeks due to the impact of the hurricanes and the approaching election, the FAA’s latest report for August shows that bizjet flight activity on a TTM basis is down only 0.7% yoy and is holding strong at 12.6% above pre-COVID-19 levels (2019). Activity in Europe, according to the EBAA, is actually up 1.5% yoy. From a segment perspective, according to WINGX’s latest market update, fractional fleet operators remain the best performers by far, soaring 10% yoy. We view this as a positive for BBD as it is best positioned among the long-range OEMs. BBD derives ~20% of its backlog from fleet customers whereas Gulfstream and Dassault have little exposure. Finally, on the execution front, BBD was the only bizjet OEM to beat consensus for deliveries in 2Q, which further demonstrates that BBD continues to successfully mitigate supply chain risks (benefiting from its now pure-play focus). With Boeing’s work stoppage entering its fifth week, reports that Airbus will likely downgrade its plane delivery target, the issues at supplier Spirit (not related to BBD) and accounts that Gulfstream’s G700 deliveries have fallen behind (reportedly delivered only three in 3Q vs 11 in 2Q), we view BBD’s outperformance vs the A&D sector as quite staggering. Flawless execution as of late deserves multiple expansion, in our view (still trading at a 35% discount to bizjet peers at only 6.8x EV/EBITDA FY2).
Furthermore, aerospace industry data sources reportedly forecast that BBD deliveries will exceed consensus of 30 in 3Q (we forecast 28). ( Note from Tempo: our own source too).This could translate into stronger-than-expected FCF in 3Q while also derisking the seasonal 4Q delivery ramp. We currently forecast that BBD will deliver 64 planes in 4Q, accounting for 42% of its annual deliveries; however, we would highlight that the company is no stranger to this type of situation, given it has occurred many times in the past (for reference, last year BBD delivered 56 units in 4Q, or 41% of annual deliveries of 138). To conclude, we remain positive on the BBD story despite the run-up in the share price. We will be closely monitoring the upcoming NBAA as the event has been an order catalyst for bizjet OEMs in the past. However, this is less likely this year as OEMs have pulled back resources and want to concentrate on private customer events. Gulfstream and Dassault will not be exhibiting this year.