02 August 2019 by jbchevrel
Bombardier (BOMB) reverted wider on the back of disappointing results for Q2. The 5y CDS has widened c100bp over the past two sessions, the big chunk of the move having happened yesterday. This was after BOMB’s profit and margin dropped more than anticipated. The company is divided between Aviation (incl. Commercial Aircrafts, Business Aircrafts & Aerostructures) and Transportation (which manufactures train-like vehicles such as metro, tram, light rail, commuter, monorail). This drop (& miss) in profit occurred in almost all sub-units (exception: Commercial Aircrafts). In particular, the Transportation unit’s margins and cash flow fell due to additional costs coming from legacy projects (BT Action Plan) involving trains in UK/Germany/Switzerland. That cost a c$275m (mid-point of the $250-300m range) more than previously planned through 2019. BOMB also revised its guidance down. Indeed, BOMB now expects sales between $16.5b and $17b, from >=$17b. They still guide a revenue of c$8.75b for the Transportation unit but they cut the guidance in the aviation arm. That legacy project is the main driver behind the downward revision to cash flow guidance (from breakeven +/- $250m to c-$500m). Business Aircrafts & Aerostructure (BA&A) top line came up thanks to more deliveries, but margin-wise, this unit is under pressure. Globally at the group level, revenue printed around flat vs Q2-18, in Q2-19, at $4.3b. Stable. But, due to BA&A mainly, adjusted EBIT as per company presentation fell -24% and are now consistent with sub-5% margins. This trend may let one suppose that legacy train projects can continue to drag EBIT margin and FCF further into 2020. EBIT are guided down -30%, while FCF is expected -$500m. The business looks broadly unbalanced, between the rail business, which drives cash flow and the jet business, which is more of a drag.