TD: Q3 previewNote from Tempo1: It is a cut and paste of different parts of the report on all the companies in the aerospace universe.
We are adjusting our forecasts to reflect updated currency, interest rate and industryrelated assumptions, along with other company-specific factors, the net impact of which biases our BBD target higher ($132.00 vs $129.00), CAE target lower ($33.00 vs $34.00), and is immaterial to HRX and MAL targets. Our recommendations remain unchanged (Exhibit 2). For CAE, HRX and MAL, we have not factored a prolonged Boeing strike into estimates and will look to results for an update on the impact.
Bombardier: We forecast revenue of $1.9 billion (consensus: $1.80 billion), up 4% y/y, based on flat deliveries and 9% Service revenue growth, partially offset by mix shift towards Challengers. We estimate Adjusted EBITDA of $308 million (consensus: $289 million), up 8% y/y, and 60 bps of margin expansion due to aftermarket services growth and pricing, partially offset by mix shift. We forecast FCF usage of $144 million (consensus: usage of $45 million). Forecast FCF this quarter is subject to the challenges of estimating the impact of ramping-up Global production. Investors should watch the b:b ratio as it remains one of the more uncertain data points that has historically been important for the share price. Textron and General Dynamics reported a 1.1x and 1.0x b:b, respectively, for their business jet units (see page 2). We believe investors should expect a b:b of 0.9-1.1x through the rest of the year, although a Q3 value below this level would not alter our investment thesis.
Key business jet OEM’s reported Q3/24 results last week. Results are most relevant for Bombardier (100% of revenue), followed by CAE, HRX, and MAL. Achieving delivery plans remains challenging due to supply chain and operational challenges, though we believe delivery shortfalls are specific to GD and TXT and have limited read-through for BBD. BBD is the only business jet manufacturer to have met or exceeded its delivery guidance since 2021 despite facing similar industry-wide operational challenges. Q3 business aviation aftermarket revenue growth remains strong (GD +16% & TXT +5% vs. our +9% BBD forecast). Net pricing (less inflation) remains a positive contributor for margins, but is normalizing. Demand for new aircraft remains strong. There was nothing in either company’s outlook to cause us concern regarding our 2024 assumptions for BBD deliveries/revenue or EBIT margin (10.4% BBD EBIT forecast vs. GD and TXT’s business aircraft segment guidance for 13.2% and 11%, respectively).
Our target price is based on an 8.5x EV/EBITDA multiple applied to adjusted EBITDA for the Q3/25- Q2/26 period, and net debt (including preferred shares and lease liabilities) as at Q2/25. Our target valuation multiple considers current and historical multiples for BBD and comparable companies, BBD's higher financial leverage, significant improvement in financial results, improving revenue quality, margin stability, and FCF predictability
Key risks to our target price include the following: limited revenue diversification; prolonged work stoppages; shareprice volatility; input cost inflation; sustained long-term strength in the price of oil; appreciation of the Canadian dollar; competition; unusual effects on demand for private travel including ESG considerations; high financial leverage; cost overruns on major projects; and subordinate voting share structure (Bombardier/Beaudoin/Fontaine family controls approximately 53% of votes)