Bombardier Inc. T.BBD.A

RBC: Surprised by the market reaction

[Tempo1]

BBD caps off a strong year with a solid Q4 beat; 2024 guidance in-line and potentially conservative

Our view:

We are very surprised by the negative market reaction to the strong Q4 beat and 2024 guide. Very likely the market is focused on the weaker 2024 FCF guide vs consensus and the interpretation that this leads to a lower systemic level of cash flow post 2024 (and the view that 2025 guide of >$900MM is at risk). On our call back with mgmt, walked us through the bridge to that $900MM guide, which we consider reasonable. Accordingly, we view the reaction as unwarranted and would be aggressive buyers of the stock on this weakness.

Key points:

Strong Q4/23. EBITDA of $458MM (+30% y/y) was above consensus $415MM (RBC: $411MM) as the company generated solid revenue ($3,062MM vs cons $2,875MM) on the back of strong aircraft pricing and another solid quarter growth in services revenue (+16%). Deliveries were in-line but the strong pricing and positive mix effect of services drove EBITDA margins to 15% (+170bps y/y) leading to the EBITDA beat. FCF was close enough to call in-line at $646MM vs cons $666MM — successfully meeting guidance forecasts for the year. And with another $400MM of debt reduction (combined with the higher EBITDA base), leverage dropped substantially to 3.3x (from 4.6x last year). Overall a very successful 2023 for Bombardier where it met or exceeded all guidance targets.

• New 2024 guidance set - in-line, with exception of FCF. Mgmt provided its 2024 guidance, with details on each of the line-items provided in Exhibit 5. Revenue guide was above consensus expectations (likely on strong pricing), while EBITDA and EBIT guidance aligns with expectations at the top end of the range. The one area of focus is the FCF guide of $100MM to $400MM, which is below consensus $565MM and is meaningfully lower than the 2025 guide for >$900MM. Key is that the variance in 2024 is attributable mainly to working capital build (and therefore temporary); and we discussed the bridge to >$900MM in 2025, which we outline in Exhibit 4.

• Estimates. We are not making any significant changes to our core assumptions. Our 2024E EBITDA comes down slightly to align with guidance; while our 2025E EBITDA remains unchanged. Our FCF adjusts to reflect the 2024 (lower) guide.

• Share price. reaction unwarranted   As noted above, we are highly surprised by the significant negative reaction in the shares today on what can only be explained by the company's FCF guide for 2024. Based on the bridge outlined in Exhibit 4, we have confidence that BBD will be able to meet their 2025 objectives. Moreover, we flag that at current levels, the stock is trading at 4.8 EV/EBITDA on a 2025E basis, or a ~57% discount to peers. Our target multiple of 6.5x is based on a ~35% discount to peers and results in a PT of $95 from $98. Reiterate OP rating.

[johnney]

Do we still have to believe them, now! Who would of thought this here today, with this big drop, no one in my opinion! Close your computers, and light it up in end 2025!!

[Snowey]

Thank you. Very helpful.  Do you have Exhibit 4 on FCF mentioned? GLTA Snowey.

[Tempo1]

They did an explanation by two ways: A : FCF 2024 (mid point)                    $250 MM Plus incremental EBITDA             $300 MM Plus Interest savings                        $75 MM Plus Working Cap release           

[PabloLafortune]

In order to save $75M interest in 2025, they'd have to repay $1B of debt at the end of 2024......who comes up with this stuff. Overall I don't see an improved balance sheet that could be used to repay LTD but I do see a resilient balance sheet that dealt with a reduction in long term deposits and of course continued cleaning up of the other assets and liabilities. Still a long way to go

[BBDB859]

This is a very interesting time for the company. I'm just trying to put this puzzle, of the current events together. So after giving it some thought, here is what I came with. I will say this though. I'm not seeing this Guidence for 2024 as such a big problem, or such a hurdle as the market has. The reason I feel this way, is because the company has shown me something that I was

[1234bmth]

Almost 9% recovery the day right after the initially almost 15% drop after the earnings is very bullish. This stock can easily climb to $70 in no time, I just hope that the latest US bombardier plane crash doesn't affect this uptrend, even it was a 20 years old plane and the cause yet to be determined, but since it is Canadian plane it may affect the SP performance,but I hope not.

[NoNameAtAll]

I'm not too concerned about the negative press from the crash.  I was in hockey rink for son's hockey game last night and overheard people talking about Taylor Swift making ridiculous trip to Tokyo to do four concerts and then needing to make it back to Vegas for Superbowl game.  Looked it up and what is the only plane that will allow that to happen - a chartered Global 7500

[balmusette]

Summary of an article in the publication Simple Flying august 2022, by Justin Hayward. Double engines failure are rare, but they do happen. Standard mechanical issue is very unlikely. Other issues are to blame: Fuel issues:  running out of fuel                      fuel obstruction by ice crystals. ( contaminated fuel ...? ) 

[Transit77]

Highly unlikely it was not due to the plane. I believe they did an overhaul and the track record of that plane was flawless. Lastly the cause seems to be in line with a fuel contamination based on early research. Hop-A-Jet is on the hook for this as they are the ones maintaining a 20 year old Jet. Bombardier did not fulfill the maintenance of this product from my preliminary research. Lastly two

[Lukegermany]

Great Post bbd... I asking myself why they are expand their production faster than they want to Do it in their guidance. Does it is only because they have to accelarate the Producer Planes.. morgen challenger less globals..or did they know that they will get a big order somewhere this year..than all the FCF problem would gone in one second..i hope that they get that order and get a nice upfront

[BBDB859]

Hi Luke. I guess the only way to describe what their intention is is, to follow what's they're doing with production. They've expanded production, as per guidance. They probably have a plan to become the best, and strongest Business Jet OEM in the Industry. They're producing more planes than Gulfstream. and they're delivering everything they said they will produce. So the

[PabloLafortune]

859, I did a fairly thorough for me (an amaateur) analysis of Bombardier's balance sheet and my conclusion is they generated $300MM of cash in 2023, it just didn't go to LTD. So its probably not unreasonable that this would increase to $400M and $500M in 2024 and 2025 respectively.  My calculation for the $300MM is as follows: opreating current assets (cash inventory receiv pay

[BBDB859]

Hi Pablo. Thanks for taking the time to do all this work. This re-affirms what the Cash on Hand told me. This had to be done to confirm the Cash on Hand in a diferent way, and you've done that. I feel that this assumption has now been proved with your work. I'll rely on your findings, because these days I don't have a ton of time to dedicate to some things. The Bomber Financial

[PabloLafortune]

859, I'm not knowledgeable enough (not at all) to discuss competitiveness with Gulfstream. But my general observation is that while bombardier has a solid business model, it would be even better if they could afford to invest more in new products. Which they'll be able to when less cashflow is applied to interest and debt repayment.

[BBDB859]

Correct. Hopefully that time will get here sooner rather than layer Pablo. 2025 is now the new target. Cheers

[johnney]

Notice, it's being pushed further and further!, may be in 2026!!

[clubhouse19]

  When it comes to abusive shorting and counterfeiting shares ..reality has no place in the market.  Unfortunately the authorities are complicit in this. Whther rbc is says this is overeactiion or not they are just as complicit as all other market institutions even if some manipulate a little or some alot.  The authorities gladly let this happen as for some reason it suits their