Author Topic: ERJ - Embraer  (Read 744 times)

chesko182

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ERJ - Embraer
« on: August 11, 2018, 11:14:10 AM »
Came across this idea last week from (you’ll never guess) Bank of America Research. Embraer is the third largest aircraft manufacturer in the world, but much smaller than the industry dominants Boeing and Airbus. It is based in Brazil and has three segments: commercial planes, executive jets and defense/military planes. A month ago Boeing announced it had entered into a non-binding agreement to form a Joint Venture with Embraer for their commercial planes business, where Boeing will own 80% and Embraer the remaining 20% (effectively acquiring the business), as a result Boeing is set to pay Embraer $3.8bn for the 80% stake, valuing it at $4.75bn. Embraer expects to receive $3.1bn after-tax and return a chunk of that to shareholders via buybacks and dividends. Debt is expected to be around 400mm after the transaction, so approximately 2.7bn will be available to return to shareholders, management has stated that they intend to return at least 1.7bn or $9 per ADR.

The stock (ADR) had been trading around $24 and has promptly sold off to $19, in part due to broad selloff of Brazil and EM related stocks. That leaves the “stub” (19-9) valued at $10, where you basically get: 1) Embraer’s stake in the JV 2) Executive Jet business 3) Defense business 4) any remaining cash that is not returned to shareholders (assuming they return 1.7bn it would be 1bn (net of debt)

To be clear, I have to do more work on the value of the other two businesses, but from a first peak it looks like the stub is trading very cheap.

JV value (20%): 950mm
Cash after tax, net of debt: 2,700mm (prior to any distributions)
Executive Jet + Defense biz: 1,250mm (very quick math...management expects 2.5bn of revenues between these two segments, 5% profit margin and 10X multiple assumed, which I think are conservative)
Total 4.9bn vs current market cap of 3.3bn roughly 50% upside.

The big question is if the Brazilian government/regulators will approve the transaction. There will be presidential elections in October, and this may be a large determinant. If the right wing candidate wings the odds of this passing are higher than if the left wing candidate wins. Currently the right-wing candidate is leading the polls.

Clearly I need to do more work but I found this interesting, would love to hear anyone's thoughts on this.
« Last Edit: August 13, 2018, 12:28:33 AM by Parsad »
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Pondside47

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Re: ERJ - Embraer (Special Situation)
« Reply #1 on: August 12, 2018, 01:02:17 PM »
Thanks for the idea. The prospect of defense and executive jet business seem to be on the upside since both are at cyclical trough. Without the injection of cash from Boeing, the commercial unit is on its way to generate significant amount of cash in the near future as investment level comes down. It could be a double with one bird already in hand if management will return the cash to shareholder.

Own The Rails

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Re: ERJ - Embraer (Special Situation)
« Reply #2 on: August 12, 2018, 09:20:39 PM »
Thanks for sharing, very interesting opportunity.

FT piece on the deal's uncertainty: https://www.ft.com/content/15b2f0e2-8095-11e8-bc55-50daf11b720d

One thought: While Bolsonaro (right-wing) is definitely a pro-business candidate, he is also a staunch nationalist. So I'm not sure how his base would react if he supported giving up control of a proudly Brazilian enterprise (may be oversimplication but feels similar to how Trump has lambasted US-based industrials reliant on foreign manufacturing).

The fact that the government is also an equity holder makes me a bit uneasy. Do we know what their approx share is?