CA - Bombardier: Benefiting From Learning Economies And Aftermarket

Summary

• Bombardier is seeing aftermarket contribution grow in the mix as deliveries fall YoY and flight activity rises, contributing to better margins.
• Furthermore, margin expansion continues as sustained deliveries of the new G7500 allows the assembly line to learn and improve, i.e generate learning economies.
• EPS is improving on greater EBITDA margins and lower debt expense, as deleveraging has gone quite well. The discount from financial strain is shrinking.
• Backlog continues to grow, and the economics of Bombardier should improve further. With the leverage likely to shrink, we think Bombardier has some upside for shareholders.

Bombardier ( BDRAF )( BDRBF )( BBD.A:CA ) is a company that we've followed for awhile now. The latter half of this year saw YoY declines in deliveries as supply chain issues impact 2022 performance, but aftermarket is strong. Continued learning economies helped create EBITDA margin expansion, and deleveraging is reducing financial strain on the company and allowing it to revalue. EPS is getting into positive territories, and with stable BG&A markets, we think Bombardier remains a nice proposition, although it remains premiumized on an EV/EBITDA basis compared to other private jet players.

Quick Q3 Comment

The Bombardier Q3 verified a few points. The G7500 is a new introduction to the line-up of large cabin jets. Since it's so new, it actually takes a while for the assembly line to get efficient and start building it. Learning economies started with its introduction a couple of quarters ago, and we are still seeing the incremental benefit now .

The other major thing is the aftermarket revenue, which is up over 20% YoY and has gone in the mix from 21% to 26% in 2022 Q3. This segment is critical because it is a higher margin contribution than deliveries, and the substantial recovery in travel in the BG&A market flight hours has been an important driver of continued maintenance activity. Deliveries were down slightly YoY , but aftermarket increases in the mix means that revenues stayed strong and they had higher average margins.

EPS has grown substantially too as deleveraging continues. The net debt is currently around $4.5 billion, and the savings have been substantial since 2020 at almost $300 million, which is about 50% of the current EBIT. Financial strain on the company is coming to an end, which has allowed for a substantial revaluation as it approaches profitability since the middle of 2022.

Bottom Line

Deliveries are a little slower this year as 2022 was more affected by delays in logistics and the other parts of the supply chain. Still, revenue stayed flat YoY, and the backlog is coming up nicely, more than the deliveries fell, indicating clearly that there is continued demand for private jets by both individuals and fleets. With the pandemic promoting adoption of demand for chartered travel as well, we think the BG&A landscape has grown and taken over a bit from commercial aviation which remains fraught with troubles, also on the airport infrastructure side, that FBOs which serve private jets will not have. These sorts of customers, who operate private jets as assets, will also be a more forecastable and planned source of business and help build backlog.

While there's going to be diminishing returns on the G7500 learning economies, a delivery recovery will continue to add to the company's profits and help it deal with an increasingly refinanced debt structure, with less dangerous maturities. The delivery increase that the company expects is substantial, and they've said with confidence that they want a 15-20% increase in the next year - very plausible as supply chain issues recede.

We also like that Bombardier differentiates itself by getting business backflow from the pre-owned market, since it refreshes its own jets and refits them with new avionics in many pre-owned transactions. There is double digit delivery growth here and it helps the aftermarket revenues.

While we like Bombardier, we still think it's quite expensive. We argue that Embraer ( ERJ ) is a better deal between the two , if hunting on major North American markets only. The Eve Holdings ( EVEX ) ownership adds a lot to the non-operating asset base, and if you apply private jet company multiples to its relevant segments, the upside becomes much more substantial than what we could reliably get on Bombardier. Also, we wonder about Bombardier's ability to reach its 2025 guidance of $1.5 billion in EBITDA. That would require a doubling from here. While benefits from learning economies will help, as well as operational improvements, there'll need to be quite a bit more scale and some very effective cost saving measures. They did manage to more than double EBITDA from 2020 to 2021, but of course 2020 was a COVID-19 comp, which doesn't reflect a normal operating situation. We'll see.

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