Bombardier could fetch triple its current valuation if sold, CIBC analyst suggests
With few options to rescue itself from mediocrity, Bombardier Inc. may look to sell its business and could fetch more than triple its current valuation, a new note from a CIBC analyst suggests.
Earlier this week, the plane and train maker issued its second profit warning in less than a year, slashing its forecast on 2019 adjusted earnings before interest and taxes in half to $400 million. Bombardier also announced that it is reassessing its partnership with Airbus on the A220 narrowbody jet. The deal was made in an attempt to bring its balance sheet back to health, but now it may be subject to a writedown.
Bombardier shares plunged 37 per cent on the news Thursday, the largest single-day fall in its history. Bombardier said it would be “pursuing options to strengthen its balance sheet and enhance shareholder value.”
Despite the issues that have plagued the company, it remains a market leader in passenger rail and in business jets
CIBC analyst Kevin Chiang
Having already sold off a number of its assets to improve profitability, Bombardier may now look to explore its own sale, CIBC analyst Kevin Chiang said in a note published on Friday. In a potential deal, Bombardier could be worth between $2 per share and $4 per share, Chiang wrote. That mark is substantially higher than the $1.21 Bombardier’s Class B shares were hovering around in early trading.
“We do not view Bombardier as a distressed seller given its currently liquidity position provides it with a buffer,” Chiang said. “Despite the issues that have plagued the company, it remains a market leader in passenger rail and in business jets, its two remaining divisions.”
Chiang calculated Bombardier’s potential value using 2020 estimates and EBITDA of $1.7 billion. By 2020, the two U.K. contracts that have acted as headwinds and were the main driver of its fourth-quarter earnings miss will be completed.
His calculations also consolidate the debt Bombardier has between its aviation and rail divisions and incorporates the average comp multiples for both — 8.8x and 10.1x respectively. Lastly, the calculations also assume that the Caisse de dépôt et placement du Québec will require a three-year, 15 per cent compound return from its $1.5 billion investment in the company.
Notably, despite its struggles, Chiang is also confident that Bombardier has the liquidity — $3.7 billion in pro-forma year-end cash — to manage through the turbulence. He still expects the company’s fortunes to reverse, even without a sale, but it will take time for management to convince investors to jump back on-board.
“While 2018/19 have been disappointing years, we do see line of sight to BBD’s operations improving, especially as it delivers on its problem (rail) contracts,” he wrote. ” But with management credibility having taken a hit, and BBD is now even more of a show-me story, we recognize that it will need to begin delivering against its targets before investor sentiment improves.”