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September 11, 2023
Outperform
TSX: DOO; CAD 101.47; NASDAQ: DOOO
Price Target CAD 147.00 ↑ 141.00
BRP Inc. Continuing to execute well
Our view: We maintain our positive view on BRP following Q2 results that were ahead of RBC/consensus. While Marine has had a challenging year (reflected in updated guidance), the outlook for Powersports remains favorable and BRP management continues to execute well against an uncertain macro backdrop. Revising PT +$6 to $147; reiterate OP.
Key points:
Thoughts exiting Q2 – While Q2 results were generally ahead of expectations (see inside for details), the downward revision to revenue guidance (driven by Marine and PA&A/OEM Engines) took some focus away from the fact that the Powersports categories continue to trend well and that the Normalized EBITDA guidance was reiterated for the full-year (EPS guidance was actually increased). Questions on the earnings call largely centered around the drivers of the varying trends across Powersports/ Marine, and puts/takes on the H2 outlook. The 2023 Marine season has not gone according to initial expectations due to a combination of supply chain issues (component issues have impacted sales for the second straight quarter), poor weather conditions, and the impact of higher interest rates (which disproportionately impacted Marine given high ticket prices/much long amortization periods). This drove a meaningful reduction to Marine YoY revenue growth guidance for F2023 (+5%-10% vs. +35%-40% prev.), with management now refocusing its efforts on the 2024 season (which we believe is prudent). Looking ahead, we remain confident in the company's ability to execute on its Marine strategy. For instance, the Sea-Doo Switch was the third best-selling pontoon in the U.S. from March-May (retail up >200%), while the company continues to report that consumer reaction to the new Rotax Stealth design is positive.
Powersports performing well, core customer is in good shape, dealer inventory has largely normalized – Despite the challenges in the Marine segment, BRP continues to deliver strong Powersports results (sales of $2.7B were well ahead of our $2.3B forecast). Additionally, this business has nearly achieved 30% SSV market share in North America (achieved "high-30s" in Canada), which recall is a core growth objective embedded in the company's M25 targets. This appears to be driven in part by the strong financial health of BRP's core customers, whose self-reported average household income exceeds $165k (+40% vs. pre-COVID). Management characterized dealer inventory as being in a "good position", though the network is operating with lower inventory days vs. historical levels.
Balance sheet and capital allocation update – BRP exited Q2 with leverage of ~1.3x (-0.2x QoQ) and reduced F2024 Capex guidance to $650-$700MM (vs. $750-$800MM prev.), reflecting a postponement of Marine growth investments. The balance sheet is in good shape and provides flexibility with respect to capital allocation, in our view (growth investments remain the priority, excess capital could be directed to ~900k share allowance remaining under existing NCIB).
