Posted in Value Labs 13/3/22
Bombardier (OTCQX:BDRBF) is one of the stocks we focus on in our private aviation paper. The thinking is that the COVID situation should turn some casual corporate and first-class passengers into private jet owners or charterers, especially in the small to mid-sized cabin market. Also, those with more money will use larger private jets more for recreational purposes in order to benefit from the safety of owning a private jet, as travel on commercial airlines is less comfortable and more restricted . We’re right on the campaign argument that B&GA is very strong, but what’s even more surprising is the incremental increase in deliveries coming from Bombardier’s large cabin jets, which is a testament to their brand and quality. However, it also highlights the risks for Russia.Overall, Bombardier’s outlook remains solid and the stock isn’t too expensive, but Dassault Aviation (OTCPK:DUAVF) In terms of valuation and momentum, it’s still obvious and still more interesting.
Fiscal 2021 Overview
It’s been a great year for Bombardier. Deliveries grew from 114 in 2020 to 120 in 2021, with all the additional growth coming from the most profitable large cabin segment.
In addition, there has also been a major recovery in the aftermarket. At the beginning of the year, flight activity was still 20% below pre-pandemic levels, but by the end of the year it was 20% above pre-pandemic levels. Management is wary of making any overly strong claims, but they appear to confirm our thesis that these changes are likely to be structural to some extent, implying a continued increase in flight activity conditions. As this is a key driver of aftermarket revenue, which contributes significantly to margins, we have a strong carrier that we will be profitable in 2022 if pre-COVID flight activity levels persist. Strong growth, even surpassing this year’s levels.
The Global 7500 is one of Bombardier’s jumbo jets, and it’s improving its economics thanks to learning scale. Learning economics is sticky downwards, so even though the growth of the 7500 is hampered by more international travel restrictions, which was a concern when we last reported on the stock, the economics have continued to improve, turning the 7500 into a profit and Not a loss contributor.
Leverage has also been a concern for Bombardier in the past and was the focus of many issues in last quarter’s earnings. However, the deleveraging was strong. Maturities are clear, there are no maturities in the next 3 years, and the debt is reduced by about $3 billion, which means significant interest savings.
The average maturity of our bonds increased from 3 years to 5 years, and we were able to reduce our annual interest expense by more than $225 million compared to the previous year.
Bombardier CEO Eric Martel
Net debt is around $5 billion and a market cap of $3.2 billion puts EV/EBITDA at nearly 13 times. Not an unreasonable multiple that could include more aftermarket next year as profitability improves, as well as the continued learning economy of the Global 7500.
While the picture looks quite positive and the momentum is on Bombardier’s side in terms of business performance, the superior B&GA conditions for the full year are not fully reflected in the 2021 results, but there are some risks to point out. Mainly related to Russia.
Dassault Aviation, which has ties to the French military through its Rafale program, has explicitly refused to do business with Russians who could be sanctioned. They took no risks here and froze contracts with wealthy Russians. Russian buyers tend to favor Dassault’s larger-cabin jets because of Russia’s vast size. Dassault isn’t really known for having the biggest jets, in fact, most of its growth is in the small to mid-sized cabin, assuming development based on unit intake versus dollar intake. Although some profits have to be excluded from the 2022 forecast, they are not too vulnerable to the problem.
Bombardier, on the other hand, is more focused on larger-cabin jets. We think they are more vulnerable to this risk, especially as Russia is an important part of the economic recovery and Asia is still lagging behind due to restrictions.
Growth in the rest of the world was slow in the first and second quarters of last year, but we’ve seen a big recovery in Europe in the third and fourth quarters, which I’ll call Russia’s EMEA region. So we’ve seen some recovery in the second half of last year. Asia was pretty slow for all of us last year in terms of flying, but it was the same in terms of activity. This is our picture.
Bombardier CEO Eric Martel
While in the outlook, growth is expected to come from mid-size jets, meaning that growth in deliveries won’t be impacted by Russian insurance, the steady cash flow that typically comes from large-cabin jets could be. That’s not good news as the company has been pinning its hopes on a profit contribution from the large-cabin jets. Dassault didn’t reveal the impact of the Russian sanctions on its deliveries, so we can’t say how bad this will be for Bombardier, but I wouldn’t be surprised if 6 to 10 of the 66 large-cabin jets in 2021 might have them went to the Russians. So 10% is our guess as to how much risk there is there. Russia’s aftermarket contribution could also be affected by sanctions.
What impression does this make on us? Well, Bombardier’s 2022 results are likely to be in line with an improvement in 2021. Growth in midsize jets is in their favor, and the aftermarket should see gradual improvement in 2022. Since the aftermarket is a significant profit contributor, the impact of sanctions on the Russians should be mitigated considerably. At a multiple of 13, however, Bombardier is still not valued on a par with Dassault, which has a growing cash balance and growing value of its other non-operating assets, but whose operating business is worth almost negligible. Pick Bombardier over Dassault as a value investor and you’ll go crazy. As the risk of sanctions against Bombardier appears to be more pronounced, Dassault has benefited significantly from the geopolitical tensions in the Rafale section, and they are also more in favor of the current situation. On the basis of value and momentum, we prefer Dassault.