Bombardier Inc.

Benoit Poirier, CFA, MBA, Analyst

Solid execution by the new management team on its five-year turnaround plan since this was implemented in 2015.
Success of partnership with Airbus could create up to US$2.5b of value.
Bombardier Transportation remains a key driver—industry fundamentals continue to be strong, translating into solid booking activity and margin improvement.

Bombardier is a leading global manufacturer of both planes (47% of 2017 revenues) and trains (53%). Its Aerospace division manufactures business jets (Learjet, Challenger and Global) and commercial aircraft (C Series, Q400 and CRJ), while the Transportation division covers the full spectrum of rail solutions, including rail vehicles, propulsion and controls, bogies, transportation systems, rail control solutions and maintenance services. The company has 66,000 employees globally.

In October 2017, Bombardier announced an agreement with Airbus whereby the latter will provide procurement, sales and marketing, and customer support expertise in exchange for a 50.01% interest in the C Series Aircraft Limited Partnership (CSALP). With this partnership, Bombardier management expects to double the value of the C Series program, driven by significant production cost savings. This should also translate into higher market share and additional deliveries. The partnership with Airbus is expected to close later in 2Q18—a key milestone for ensuring the program's success.

Looking at the business aircraft segment, the Global 7000 program has now flown more than 1,800 hours, and management reiterated its guidance of entry into service in the back half of 2018. This remains a key driver for achieving 2018 guidance, given the Global family generates the highest margin in Bombardier's aircraft portfolio. Industry fundamentals are also pointing in the right direction, with business jet utilization up in the US and Europe, and with pre-owned inventory now at its lowest level since 2007.

We continue to be pleased with the performance of Bombardier Transportation, driven by strong industry fundamentals (book-to-bill ratio of 1.0x in 1Q18), its solid backlog (US$35.7b) and stellar operational results (EBIT margin of 8.2% in 1Q18 vs 6.1% two years ago). Management is currently targeting an EBIT margin of 9.0%+ in 2020—which is achievable, in our view. Moving forward, Bombardier will have the opportunity to buy back Caisse de dépôt et placement du Québec's interest in the division as early as February 2019. This remains one of our preferred cash deployment opportunities as operational and financial control of Bombardier Transportation would be a key lever for value creation, in our view.

While debt levels are still elevated, management has set a clear path toward free cash flow (FCF) generation, consistently beating FCF expectations. Based on management expectations, FCF should break even in 2018 before returning to positive territory thereafter.

Our target price of C$4.75 is derived from an average of four valuation methods. The shares remain attractive, trading at an EV/EBITDA multiple of 8.5x based on our estimates for 2018, below the 9.4x average for peers. We continue to believe there is sizeable upside potential in the longer term (we estimate ~C$6.50/share), assuming the company meets its 2020 objectives.