Héroux-Devtek Inc.

 

Héroux-Devtek (HRX) is the third largest manufacturer of landing gear in the world, manufacturing landing gear for both commercial and military aircraft. The company also manufactures other systems and components in the aerospace market.  They have manufacturing facilities in Canada, the U.S., and U.K. and recently Spain with the acquisition of CESA.  Roughly 10% of their sales will come from Canada, 50% from the U.S., and the remainder from Europe.  Héroux is a high-quality company with a seasoned management team.  Back in 2012 they sold their Aerostructures business which accounted for about half of the business for almost the value of the entire company, creating substantial value for shareholders.  Management increased their focus on landing gear, winning programs such as the 777 and 777X from Boeing.  This was the first such program of a complete landing gear system for a large airplane for the company so they had to invest in equipment and capacity; although this was positioning the company for growth, it came at an expense to profitability as margins were compressed.  Due to certification requirements the company has not established, certain processes were outsourced while they were working towards those certifications; these should now be largely complete by the end of FY19 which sets the company up to recapture lost margins on higher sales.  Other program wins and recent acquisitions position the company for a resumption in growth and earnings; while the company does not look cheap on current earnings, expected earnings look reasonable and attainable and on that basis the company looks attractively valued.  Note: activity in the company’s stock can be illiquid at times.  It can be difficult to acquire or sell shares at a desired price.  Also due to this illiquidity, if orders for sizeable numbers of shares are issued, the clearing price of those transactions could vary significantly from recent trading activity and market orders could place the buyer/seller at risk of accepting undesirable prices. 

The stock has been flattish for about 3 years as various setbacks offset growth initiatives and earnings have softened for 2 years.  Trailing P/E looks a bit high at 18X given the stagnation over the past 2 years and EPS contraction, but growth initiatives and acquisitions are poised to drive solid growth once the loss of the U.S. Airforce contact is lapped. 

 

Ests:     4Q21   1Q22   FY21    FY22

Revs    151      n/a      563      571

EPS      .23       n/a      .76       0.84

 

P=16.12, D/C=28% but offset by NWC, TTM EPS=0.80, P/E=20X

 

4Q21   .28 vs .38 -26%, est .24, FY21 EPS .80 vs 1.00

  • May 20, 2021, P=16.12, TTM EPS=0.80, P/E=20X

  • Revs -7% to 155m, GM 16.2% vs 17.9%, adj OM 8.9% vs 10.5%, OpInc =21%

  • Defence +13% to 107.3m, Civil -33.7% to 47.7m 

  • EBITDA -13% to 25m, adj NI -26% to 10m, CFO +18% to 31.6m, FCF +39% to 23.3m

  • 2.2m in CEWS offset by pandemic costs

  • Expect stability for next 6 quarters, Backlog -11% to 717m, Net Debt 157.5m down 89m y/y due to strong CFO, fully offset by NWC

  • NCIB up to 10% of float (6.5% of total shares).

  • Decent results (and better than analysts expected) in difficult environment, while stock doesn’t look cheap at 20X when management expects stability this year, CFO and FCF are significantly better than NI, supporting the notion there’s more value than appears, also heavily discounted to US peers.

3Q21   .26 vs .24 est .16 up from .10

  • Feb 5, 2021, P=14.17, TTM EPS=0.91, P=16X, FY21 P/E=18X

  • Revs -4.5% to 150.3m (est 140m), GM 17.1% vs 18.7%, adj OM 9.4% vs 8.6%, adj OpInc +5%

  • Civil -33.7% to 48.5m, Defence +21% to 101.8m

  • CFO 26.7m vs 9.7m, FCF 20.4m vs 7.9m

  • Included 2.7m CEWS vs 5.3m in 2Q

  • Cash 95.5m, net debt 266.6m, Reduced debt by 29.1m, 57.2m YTD, Backlog -3% to 739m 

  • Mgmt doesn’t see 777X as a significant issue for them because they look at the 777 and 777X program through the same lens, sounds like the 777 is staying solid as 777X gets pushed

  • Selected to join Boeing’s Premier Bidder Program, can increase business with Boeing

  • Very solid balance sheet, mgmt. intends to further reduce inventories.

  • Crushed estimates again, company continues to rightsize the company (76% of the planned 15% workforce reduction is complete)

2Q21   .17 vs .18 -6%, est .08

  • Nov 13, 2020, P=12.25, TTM EPS=0.89, PE=14X

  • Revs -5.8% to 137.1m, GM 15.4% vs 15.3%, adj OM 7.1% vs 7.2%

  • Includes $5.3m of support vs 3.5m in 1Q

  • Civil -27% to 47.1m, Defence +11.6% to 89.98m

  • Backlog 764m -1% q/q, reasonably stable in this environment

  • CFO 15.4m vs 12.5m, FCF 13.4m vs 7.2m (2X NI vs 1.1X)

  • Delivered 1st landing gear shipsets for F-18, expect substantial growth from this program, also ramping for Boeing MQ-25, Sikorsky CH-53K, and Saab Gripen E.  F-15 to kick in late 2021.  

  • Stock very attractive at these levels, largely being ignored because valuation has contracted to 12X normalized earnings compared to things like SPR which have contracted to under 5X but that’s due to hugely negative EPS and much higher debt levels

Mid Quarter Update – Oct 5, 2020

  • Awarded “major multi-year contract” by Boeing for new actuation components on several commercial aircraft platforms including 747, 767, 777, 777X, 787

  • This is the largest contract award for HRX Spain since they acquired CESA 2 years ago. 

1Q21   .09 vs .19, est .07 down from .18

  • Aug 7, 2020, P=9.83, TTM EPS=0.90, P/E=11X

  • Revs -10.5% to 128.3m, adj OM 5.8% vs 7.7%, OpInc -32% but adj EBITDA -15% to 18.4m

  • Civil -25.9% to 49.9m, Defence +3.2% to 78.4m

  • Backlog 772m, 2/3 is defence

  • CFO 15.5m vs 3.7m, FCF 10.2m vs (1.6m)

  • CFO/share was .43 and in line with adj EBITDA so not skewed by working capital items, incredible value remains.  

4Q20 .38 vs .36 +5.5%, est .30, FY20 EPS 1.00 vs 0.84 

  • May 21, 2020, P=8.98, TTM EPS-1.00, P/E=9X

  • Results exclude non-cash impairment goodwill impairment charge due to impact of COVID-19 on commercial business

  • Revs +5.6% to 166.8m (+0.5% organic), adj OM 10.5% vs 10.3%, OpInc +8.5%, adj EBITDA +11.5

  • Commercial -7.8% to 72m, Defence +18.7% to 94.8m

  • Backlog +30% to 810, 2/3 of backlog is Defence

  • Reducing workforce by 10% and closing a facility to reduce fixed and variable cost

  • 193m in available liquidity, net debt 246.9m, drew 60m on revolver in April as precautionary measure.  No significant maturities until FY2025, 

  • No guidance for FY21, mgmt. expects lower sales and margins, positive CFO in FY21 and FCF, not the same company as it was in 2001, not just selling parts, more IP and value added services, more defence business, don’t think margins will get as low as in 2001 (EBITDA under 10%)

  • Mgmt being very prudent and defensive but would be willing to consider strategic acquisitions if distressed situations come up

  • %, less than 10% of FY20 sales were in Canada

  • Solid results, while near future is going to be weaker, solid defence position should help them weather the storm and emerge even stronger, they aren’t just a parts supplier anymore so their position is pretty defendable, while it will take time (patience) for business to fully recover, stock looks very attractively priced.  

  • FY21 est Revs -6% to 578m, EPS 0.68 down from previous est. of 1.14

 

Mid Quarter Update – Apr 7, 2020

Withdrew 2022 revenue guidance in light of “limited visibility over the longer-term impact of the pandemic” but highlighted their strong defence backlog to help them weather the storm. 

3Q20   .24 vs .26 -8%, est.25

  • Feb 6, 2020, P=19.89, TTM EPS=0.97, P/E=21X, FY21 P/E=17X

  • Revs +8.8% to 157.3m (+1.4% organic), GM 17.1% vs 17.2%, adj OM 8.6% vs 9.7%, OpInc -3.6% but adj EBITDA +7.3%

  • Commercial +11.8% to 73.2m, Defence +6.3% to 84.1m

  • Backlog +9.1% q/q to 839m

  • margins temporarily pressured by recent acquisitions

  • FY20 Guidance: Raised revs to 600-610m (previously 560-580), implies 4Q 153.8m-163.8m (-2.5% to +3.8%, est 167.2m)

  • Decent results especially backlog and EBITDA growth, raised guidance is welcome although implies muted 4Q y/y and a touch below estimates, longer-term opportunity still intact although FY22 guidance implies modest growth over next 2 years (likely margin expansion)

  • Mgmt expects last of surface treatment insourcing to complete in 4Q.

2Q20   .18 vs .12 +50%, est .17

  • Nov 8, 2019, P-18.21, TTM EPS=0.99, P/E=18X, FY21 P/E=16X

  • Revs +52% to 145.5m(+14.3% organic), GM 15.3% vs 16.2%, adj OM 7.7% vs 6.4%, OpInc +71% to 10.5m

  • Commercial +38.1% to 64.9m (+14.5% organic)

  • Defence +65.7% to 80.6m (+14.1% organic)

  • Backlog +3% q/q to 769m, B/B=1.15

  • GM impacted by higher manufacturing costs at Longueuil facility, mgmt. expects improved performance in 3Q and 4Q (also 3Q included 1 time cost of 700k due to new collective agrmt)

  • 2Q is usually seasonally soft, impressive that it was stronger than 1Q

  • Still progressing on internalizing surface treatment for 777 landing gear, ~55% internalized and still expect completion by end of FY20, slower than initially expected. 

  • Estimates for FY20 and FY21 look low. 

  • FY22 Guidance: Raised revs to 650-680 (previously 620-650)

1Q20   .19 vs .10 +90%, w 17% tax rate, est .18

  • Aug 9, 2019, P=18.66, TTTM EPS 0.93, P/E=20X, FY20 P/E=18X

  • Revs +67% to 143.4m (+11.4% organic), GM 16.9% vs 15.2%, OM 7.7% vs 6.1%, OpInc +111% to 11m

  • Commercial +47% to 67.4m (+9% organic), Defence +90% to 76m (+14% organic)

  • Commercial organic growth due to 777, Defence due to F35 and a few other programs.

  • Backlog 747m, +20% q/q (+13.6% ex acquisition of Alta), 65% y/y, strong inflow from Defence

  • Completed acquisition of Alta Precision on June 7thfor 18.6m

  • Outlook Update: FY2020 Revs 580-600m (increased by 20m), FY2022 Revs 650-680m (increased by 30m), guidance might be conservative as it’s ~40-60m higher than TTM revs, much of which could come in 2Q, depends on organic growth during the rest of the year. 

  • Getting some cost savings since acquisitions, also getting some additional revenue opportunities, a bit delayed on internalizing the surface treatment, should be done by end of CY19.

  • Very solid results, solid organic growth, revenue beat greater than EPS beat but that’s likely just timing of acquisitions and efficiencies, growth in backlog is impressive as is growth in profitability.  

4Q19   .36 vs .29 +24%, est. .26 down from .28, FY19 EPS .84 vs .67, +25% w 12% TR

  • May 23, 2019, P=15.40, TTM EPS=0.84 w 12% TR, P/E=18X, FY20 P/E=16X

    Revs +39.7% to 157.9m (est 145.2m), GM 18.8% vs 16.8%, OM 10.3% vs 10.7%, OpInc +34.1%

    Commercial +35.6% to 78m, flat organic

    Defence +43.9% to 79.9m, -2.7% organic due to lost USAF R&O contract.  

    Backlog +24% to 624m

    Shipped 15 777 shipsets in 4Q, 52 in FY19, expect ~60 in FY20.

    Solid results due to strong performance of acquired businesses, continued delivery ramp of 777 and 777X programs, internalization of surface treatment as previously discussed

    Outlook: FY20 Revs +16-20% to 560-580m, est 571.7m, expect tax rate to much up towards 17-19%.  Also gave 2022 target of 620-650m, more moderate growth in those next 2 years but still solid targets. 

    Very solid beat, using FCF to reduce debt alone could increase profits by up to 20% (Interest expense as a % of EBT), solid FCF could repay debt within 5 years barring increase in working cap, capex or other acquisitions, solid fundamentals nevertheless.  Solid operational growth opportunities remain as well as they’ve won other programs and others continue to grow/expand. 

3Q19   .26 vs .16, +63%, est .16

  • Feb 7, 2019, P=12.73, TTM EPS=.77. P/E=17X, FY20 P/E=14X, FY20 est looks low

  • Revs +49% to 144.5m, +8% organic, 39.6m from acquisitions, GM 17.2% vs 16.3%, adj EBITDA +68.4% to 22.9m, margin 15.8% vs 13.6%

  • Commercial +25.7% to 65.5m, Defence +76% to 79m

  • Guidance: Reiterated guidance for FY19 and FY2022, implies 4Q Revs similar to 3Q, mgmt. might be conservative but 3Q might have been a bit abnormally strong

  • Received approval for final surface treatment for 777/777X contract, will gradually contribute 0.7% to margins (6-9 months)

  • Beaver and CESA exceeded mgmt. expectations.  Have strong pipeline of potential business and a solid backlog of 629m, ex acquisitions Backlog +11% ytd

2Q19   .12 vs .11, +9% ex items, est .13 down from .14

  • Nov 12, 2018, P=12.34, TTM EPS 0.67, P/E=18X, FY20 P/E=14X

  • Revs +6.7% to 95.7m (-1.5% ex 7.4m from Beaver), GM 16.2% vs 15.1%, OM 5.5% vs 5.2%, OpInc +13.9% to 5.3m, EBITDA +9.5% to 13.2,

  • Commercial +11.5% to 47m driven by Boeing 777 and 777X, higher business jet sales, in addition to Beaver acquisition

  • Defence +2.4% to 48.6m due to Beaver acquisition

  • Backlog 479m, +25m q/q, does not include CESA which closed in 3Q.

  • FY19 Guidance: Revs 460-470m (+19-22%), 2022 expected to be 620-650m

  • Still expect to insource surface treatments by end of FY19 which should drive “significant” margin expansion in FY20, mgmt. optimistic about reducing debt over next 2 years.

  • Orders at Beaver improving since closing the deal, profitability was ~10%

  • 2H should be solid especially with the recently closed acquisitions but significant earnings improvement might be a FY20 event although estimates have come down significantly from .88 6 months ago to .65 now vs TTM .67 

1Q19   .10 vs .11

  • August 10, 2018

  • Revs -1.3% to 85.8m, GM 15.2% vs 14.9%, adj OM 6.1% vs 6.2%, OpInc -3.5% to 5.2m, adj EBITDA +2.5% to 11.9m

  • Commercial +5.6% to 45.8m driven by Boeing 777 and 777X deliveries

  • Defence -8.1% to 40m due to winding down of US Air Force contract (was ~25m per annum), now at minimal levels.

  • Completed acquisition of Beaver July 2, 2018, CESA acquisition should close in coming weeks.

  • During 1Q signed new AAR contract starts to gradually ramp in 2Q19, total value expected >65m

  • Post 1Q selected by Boeing for main landing gear and side braces for F/A – 18E/F Super Hornet and EA-18G Growler, also renewed 5-year contract by Lockheed Martin for landing gear for C-130J Hercules

  • Backlog 454m does not include Super Hornet and Hercules

  • FY19 Guidance including Beaver: Revs up mid-single-digit due to closing of Beaver

  • Solid company, and balance sheet, valuation and estimates clearly reflects acquisitions and growth offsetting the challenges that have dogged them for the past 2 years.  

 

4Q18   .29 vs .25, FY18 EPS .67 vs .73 vs .77 vs .55