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Bombardier rail offsets CSeries setbacks with Aussie, other contract wins

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MONTREAL - While Bombardier Aerospace attracts negative attention from delays in the delivery of its CSeries commercial jet, the railway division is riding relatively high amid a number of major developing opportunities around the world.

On Friday, a consortium led by Bombardier Transportation announced its latest major win — a US$4.1-billion contract from the State of Queensland in Australia.

The group will supply 75 electric passenger trains and a new depot as well as provide maintenance services for 30 years.

Bombardier (TSX:BBD.B) said its share of the New Generation Rollingstock project is worth about US$2.7 billion.

The project will renew a transportation system that serves southeastern Queensland, which includes Brisbane.

Details about where the trains will be built and the delivery schedule were not provided. Spokesman Marc Laforge said the Queensland government would disclose additional details, probably next week.

Analyst Benoit Poirier of Desjardins Capital Markets said the order reflects Bombardier's strong rail product offering.

He called Bombardier Transportation a "more down-to-earth story that is underappreciated," adding that the significant contract "creates good momentum for 2014."

The analyst said he expects the world's largest railway manufacturer to benefit from up to US$159 billion worth of upcoming opportunities around the world.

These include metro projects in London, options for regional and commuter trains in France, new double-deckers in Germany, monorails and locomotives in India, mass transit in Bangkok, high-speed and light rail vehicles in China, and transit projects in Brazil and the Middle East.

Opportunities in China appear strong as the government announced this week plans to spend billions of dollars this year as it seeks to double its high-speed railway network.

In North America, there are six new potential projects in Mexico as the government is expected to tender about US$7.4 billion for three passenger train projects this year. The United States is also considering high-speed rail in California and the northeast. Canadian projects include light rail in Edmonton and Toronto worth a total of US$9.9 billion.

And, as recently as last week, San Francisco's transit system awarded a US$639-million confirmed order to Bombardier, part of a long-term contract signed in June 2012. The order by Bay Area Rapid Transit (BART) was for an additional 365 rail cars, bringing the number of firm orders under the contract to 775 cars.

Bombardier Transportation's results in the past have sometimes shown the effects of problems in delivering several large projects, but Poirier said he's confident that new president Lutz Bertling will raise margins to about eight per cent in 2015.

Bombardier's current guidance for this year is eight per cent but Porier expects they will come in at 7.3 per cent.

Word of the Australian rail contract came a day after Bombardier Aerospace announced a further delay of up 15 months in the delivery of its new CSeries commercial jet, until the second half of 2015.

The decision prompted several analysts and Fitch Ratings to downgrade Bombardier.

Walter Spracklin of RBC Capital Markets cut his forecast to perform and reduced his target price by a third to C$4 on what he sees as increased CSeries development, demand and production risk.

The analyst said he thought development risk was beginning to decline with the successful first flight in September.

"However, the latest delay pushing entry-into-service out to the second half of 2015 was not only longer than expected but clearly indicates that a significant development risk discount remains," he wrote in a report.

Spracklin added that the later delivery schedule will prompt potential customers to put off orders and reduce Bombardier's lead over rival re-engined products from Boeing, Airbus and Embraer.

David Tyerman of Canaccord Genuity also substantially cut his target price, in his case to $4.25, saying continued CSeries program spending could pressure the company's liquidity and possibly force it to issue shares to raise money.

"The company has adequate liquidity to see the CSeries program to full production, but the buffer is not large in our forecast and there is a high degree of uncertainty in the cash flows in our forecast," he wrote.

The analyst said he now expects delivery of the first CS100 will be in the first quarter of 2016 "to be on the safe side."

Fitch reduced Bombardier's issuer default and long-term ratings one notch to BB negative with a stable outlook.

The agency said the downgrades reflect its expectation that improvements in free cash flow and debt reduction will take longer than anticipated. It said annual free cash may not be solidly positive until late 2015 as spending declines on the CSeries and other aircraft.

Moody's Investors Service said the delay will increase program costs above US$3.9 billion, complicate sales efforts and hinder efforts to reduce debt.

"The delay could also require Bombardier to lower prices to drive new orders and will likely increase working capital requirements, which would pressure the company's liquidity," it wrote Friday.

On the Toronto Stock Exchange, Bombardier's shares, which dropped 7.74 per cent after Thursday's delay announcement, fell another six cents to $4.11 on Friday. Volume was very heavy for a second day, topping 24.1 million shares.

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