BDRAF - Bombardier: Buy Yourself A Business Jet

2023-04-28 17:57:53 ET

Summary

• Bombardier margins and revenues keep expanding.
• Company will see backloaded delivery and free cash flow profile.
• Bombardier stock still has significant upside ahead.

I've covered Bombardier (BDRAF) for several years and saw the company putting itself in billions of dollars of debt to develop the C Series, the aircraft that it would never be able to capitalize on as a conflict with Boeing ( BA ) and its dire financial performance forced the company to sell some of its businesses including the commercial airplanes business. Bombardier is now a company focused on business jet production and aftermarket support for those jets, and that has been a good choice so far. In this report, I will be discussing the Q1 2023 results for Bombardier and provide a valuation of the stock.

Bombardier Stock: Impressive Share Price Return

I've been covering Bombardier for years, and since June last year I have a buy rating on the stock and that paid off with a 196.6% return. Probably the only thing I regret is not being a shareholder but sometimes analysts are better at analyzing than investing. Once Bombardier realized that it had to focus its business rather than being diversified in all directions and failing in all of them, the task was easy. Focus on one area, sell the other segments and take the associated debt out of the business and use the proceeds to pay off debt, R&D and business optimization. That has worked. With a focus on business jets we don't only see the business jet manufacturing and service revenues improving, we also see the margins improving and the debt going down.

Revenues were up 17% during the quarter to $1.453 billion with the mix between services and manufacturing being stable year-over-year. That's also something that we would expect as utilization cannot grow infinitely, the growth of aftermarket sales also is limited. Over the past year it was driven by improving flight activity but Bombardier also will at some point reach an asymptote on flight utilization driving the aftermarket sales growth. So, it will need to continue expanding its services footprint, which it already has been doing with new service centers coming online and more service center such as in Abu Dhabi opening in the future. Services revenues grew 17.5% while manufacturing grew 16.3% driven by higher aircraft deliveries and a better mix as Bombardier now focuses on large and medium-sized business jets.

Adjusted EBITDA grew by 27%, 16.6 percentage points of this was driven by revenue growth and the remainder was driven by revenue growth. Adjusted EBIT grew by nearly 90% and reported EBIT grew by 65%. So, we're really seeing the combination of higher revenues and optimizing the business coming along nicely. While the $247 million negative free cash flow compared to a positive free cash flow of $173 million suggests otherwise, the better margins and top line give Bombardier a free cash flow tailwind.

In the first quarter that wasn't visible as the company as the company is preparing to ramp up in production this year and that's a backloaded profile where most of the cash will come in by Q4. The first half will be impacted from free cash flow perspective as capex in Q1 was a bit higher than usual and there was a payment to the employee incentive plan. In Q2 free cash flow will be impacted as Bombardier will make an RVG payment of $105 million out of the $125 million scheduled for the full year. These RVGs have been a liability as Bombardier provided residual value guarantees to customers requiring to protect customers against residual value shortfalls. With this year's RVG payments that leaves $25 million on the balance virtually eliminating that headwind almost completely.

Putting Cash To Good Use

Year over year, available liquidity went down by $540, but I don't consider it a bad thing at all. $162 million went into building the inventory for a higher production, there was $85 million in capex and net long-term debt reduction of $424 million.

The debt maturity profile shows that Bombardier has no debt maturing in 2023 and 2024 and with its current cash balance it can already take out the 2025 debt as well as a significant portion of the 2026 debt. For the year, Bombardier has maintained its guidance of 138 deliveries with an adjusted EBITDA of more than $1.125 billion and more than $250 million in cash flow. With a $247 million cash burn in Q1 that leaves at least $500 million in cash to be generated in 2023 which should be enough to take out the debt for 2025 and 2026 completely.

Quarter-over-quarter, the net debt to adjusted EBITDA remained at 4.6x, but even if the cash balance does not improve which is a more than conservative assumption we will see the multiple go to 4x showing further improvement in the metrics, and with cash improvements I could see this going to 3.5x at least. In fact, Bombardier is so bullish on the future that it has increased its targets for 2025 as it was tracking ahead of the objectives. So, there's a lot of room to further deleverage with an even better target on net debt to EBITDA. With an upgrade from Moody's, refinancing also is a realistic tool that we will be seeing most likely to refinance some of the 2027 debt.

With improving financial metrics, Bombardier also is looking at beyond 2025 aiming for $1 billion in defense related sales and that is really what the current management has achieved. Bombardier went from being a company not able to look ahead one maybe two quarters to being able to plan and invest for the future with new business centers and defense penetration as it rolls out its business jets.

Conclusion: Upside Remains For Bombardier Stock

Bombardier currently has an enterprise value of $9.1 billion and with $1.16 billion in expected EBITDA for 2023, that would put its enterprise multiple at 7.9x which is well below the median of 9.3x. Based on this multiple, the stock already has 18% upside and even when we take the current multiple providing the 54% upside Bombardier stock is discounted compared to its peers. With that in mind I feel comfortable assigning a $80 price target to the stock.

Conclusion: The Growth Story Is Not Over Yet

Bombardier stock has gained significantly in the past year, but I believe that it has significantly more upside ahead as it goes through the learning curves on new jet programs, new business jets enter the scene and expansion of its services footprint. The services footprint as well as a Bombardier-native revamp program for second-hand jets make Bombardier business jets extremely attractive for customers and the company is scaling up production from around 120 last year to over 138 this year and towards 150 in the near future providing a lot of upside to the stock.

The risk obviously is the macroeconomic pressure. Elements like labor and inflation continue to pressure the supply chain stability and cost, but it should not hurt business jet sales from demand side in a direct way since a business jet is basically for the ultra-rich. However, things like turmoil in the banking sector or a broader economic downturn can hurt Bombardier as we saw the banking unrest this year result in cooling sales but I believe that with a solid backlog and flexibility in production Bombardier is positioned well. Short-lived unrest would only somewhat dampen free cash flow growth as down payment on business jets are significantly higher than for commercial airplanes.

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