BRP’s strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce

Business Strategy & Outlook

Fiscal 2023 should be another banner year for BRP’s sales given still robust consumer demand and high level of backfill units needed at its dealers. However, this will distract the team from its long-term product and operational priorities, which should improve the firm’s competitive positioning. BRP’s strategic priorities focus on market share growth, lean operations, and cultivating an engaged workforce, all while honing in on evolving customer demands. With manufacturing facilities located near demand (for example, personal watercraft in Mexico) and timely spend to increase facility capacity as needed, BRP should capture efficiencies in its plants. Firmwide centres of expertise and excellence should allow BRP to manufacture optimally, improving utilization and allowing it to bring products to market quickly, ensuring a continually relevant and in-demand product line-up (with electric vehicle offerings in all segments by 2026). Because BRP is exposed to many customer segments, acquisitions aren’t required for expansion. However, entry into white-space categories (like motorcycles) and small acquisitions, particularly in parts and accessories or marine, are possible and could support margin improvement.

BRP has fiscal 2025 goals of CAD 12 billion-CAD 12.5 billion in sales and CAD 13.50-CAD 14.50 in EPS. Sales of CAD 12.4 billion and EPS of $14.68 in fiscal 2025. Demand has persisted despite economic uncertainty, and innovation should continue to drive sales, particularly in the marine segment where BRP has launched Project Ghost (altering placement of outboard engines) and the Sea Doo Switch (marine is expected to grow to CAD 1 billion by 2025, from CAD 513 billion in 2022, according to BRP, although less than CAD 800 million with current products). In the base case, BRP’s brand intangible asset and leading market share position result in competitive returns on invested capital and a narrow economic moat. With further improvements to the manufacturing process and scale, BRP could also develop a cost advantage over time.

Financial Strengths

BRP has been reducing its leverage ratio in recent years, taking debt/adjusted EBITDA down to 1.4 times at the end of fiscal 2022 from more than 4 times in 2011, as profitability has improved. It’s not surprising that significant leverage was taken on under the management of private equity partners, and leverage will continue to be contained now that the company is publicly held. The firm is comfortable operating below its targeted leverage ratio of 2 times EBITDA, and it could be around 1-1.5 times at the end of fiscal 2023.BRP has a $1.5 billion term loan set to mature in May 2027, a $100 million term loan due 2024, as well as a small euro-denominated term loan to support research and development projects in Austria (where Rotax engines are developed). The company has a CAD 1.5 billion revolving credit facility through May 2027 to access incremental liquidity. In normal operating periods, the company expects cash on hand, cash from operations, and utilization of the credit facility should allow it to meet capital expenditure, working capital, and debt service needs. The firm has agreements in place with companies like Wells Fargo and TCF to provide floor-plan financing for dealers. The company maintains flexibility in its capital structure through stock repurchases. BRP continued on its normal course issuer bid in fiscal 2023, repurchasing around 464,000 subordinate voting shares, and also executed a substantial issuer bid for 2.4 million shares in fiscal 2022 (for CAD 250 million). Additionally, the firm returns excess cash to shareholders via a quarterly dividend of CAD 0.16 per share, which could rise at a 20% clip over the long term.

Bulls Say

BRP has white-space opportunities to expand the business faster than expectations, particularly in the marine business and some niches (like electric) of the year-round lines.
Demand from underpenetrated international markets and expansion into new markets like China could lead to demand that is higher than the forecast, which could raise utilization and productivity, leading to higher profitability.
Marine is becoming a segment with higher priority to the company, which could generate a better-than-expected operating margin as the category scales, providing cash flow upside.

Company Description

BRP designs, develops, manufactures, distributes, and markets snowmobiles, all-terrain vehicles, and personal watercraft under the Ski-Doo, Sea-Doo, Can-Am, and Lynx brand names. It also builds engines under the Rotax brand (after discontinuing the Evinrude outboard engine business in 2020) and offers clothing, parts, and accessories that cater to its core consumers. In 2018, BRP created a marine group, acquiring boat manufacturers Alumacraft, Triton (which makes Manitou pontoon boats), and Telwater (in Australia). At the end of fiscal 2022, the company marketed its products through a network of more than 2,800 independent dealers and 170 distributors in about 120 countries.

(Source: Morningstar)

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