Q2/22 Canadian Aerospace and Defence Preview TD Investment Conclusion
Our Canadian Aerospace & Defence coverage group starts reporting calendar Q2/22 results on August 4. Our estimates are in line with consensus, with the exception of Bombardier and Heroux-Devtek, which, we believe, could report slightly better-than- consensus EBITDA. We have revised our forecasts to reflect updated economic, currency, and interest rate assumptions along with other minor modelling updates, including commercial aircraft OEM production rate forecasts. The net impact of these updates are immaterial to our CAE estimates and target price while biasing all other targets slightly lower (Exhibit 2). We are maintaining a SPECULATIVE BUY recommendation on Bombardier; a BUY on Maxar, CAE, and Heroux-Devtek; and a HOLD on Magellan Aerospace.
Our current top picks in the group remain Bombardier and Heroux-Devtek. One of the key reasons is that the EBITDA based valuations for each are at significantly greater discounts relative to their respective comparable groups than historical averages. We believe that there is additional downside risk to all our target multiples in the event of a prolonged recession in key economies. However, at this time, based on our TD Economics based assumptions, we view our existing target multiples as prudent for 12-months from today when the equity market should have greater certainty as to the impact of economic conditions on commercial and business jet-based air travel.
Bombardier: Results are expected to reflect progress on its turnaround plan which includes declining production costs on the Global 7500, aftermarket service growth, and other cost saving initiatives. The company has sold out its 2022 delivery slots and a significant portion of 2023 slots, which include the impact of a 15-20% increase in production rates.
CAE: Q1/F23 growth reflects the acquisition of L3Harris Military Training and AirCentre, as well as an expected increase in business and commercial aviation activity. As airlines ramp up pilot training to facilitate increasing capacity requirements, CAE's civil segment revenue should benefit accordingly.
Maxar Technologies: We forecast a modest y/y decline in revenue and adjusted EBITDA due to the impact of a strong comparable period for Space Infrastructure (SI) in 2021, our assumptions regarding SI revenue timing for Q2-Q4/22 in order to achieve 2021 guidance, and the impact of supply chain constraints. However, we expect the y/y weakness to be temporary and secondary to any update to the launch timing and new revenue sources for Maxar's WVL constellation.
Heroux-Devtek: We forecast y/y revenue growth and EBIT margin expansion as the company continues to benefit from a recovery in narrowbody commercial aircraft, business jets and the ramp-up of certain new programs. Heroux-Devtek continues to represent a great opportunity for investors looking for exposure to the recovery in commercial aircraft while also benefitting from the company's significant exposure to new defence platforms.