CAE Inc

CAE Inc (TSX: CAE) is a global company focused on delivering training for the civil aviation, defense, security, and healthcare markets. It sells multiple types of simulators and synthetic exercises to the customers, which serve as alternatives for live-training experiences. 

Key highlights

• Augmented financials: The company reported year over year growth in the second quarter, which was driven by the strengthening of the Civil training business, the continued ramp up of structural cost saving initiatives, and the integration of the L3 Harris Military Training business in its Defense results. CAE’s revenue increased 16% to CAD 814.9 million and transformed its net loss to net profit at CAD 17.2 million.

 Source: Company Filing

• New acquisition update: For USD 392.5 million, the company purchased Sabre's AirCentre airline operations, which provides flight and crew management and optimization solutions. As a result of the aforementioned, the company's customer base in the digitally enabled flight and crew operations domains is projected to develop. AirCentre generated around USD 150 million in revenue and nearly USD 55 million in EBITDA in the 2019 calendar year (pre-pandemic).
  

• Secured free cash flows: Given the awful environment, the company's financials improved, demonstrating improved operational efficiency. The firm earned CAD 19.4 million in free cash flow in the quarter, although this was down year over year due to a decline in cash provided by operating activities, which included payments of approximately CAD 52 million for acquisition costs related with the L3H MT purchase in the quarter. Despite this, the company was able to create free cash flow, which is a significant benefit.

• Healthy Order intake: In Q2 2022, the company posted 30% rise in its order intake to CAD 871.4 million, compared to CAD 667.8 million in the previous corresponding period. The Defense book-to-sales ratio stands at 1.02x for the quarter and 0.90x for the last 12 months, while the Defense backlog, at the end of Q2 2022 stood at CAD 4,564.7 million, while the consolidated backlog stood at CAD 8,827.9 million, respectively.
  

Risks associated with investment

The bulk of the group's sales comes from the aviation sector and owing to continued lower activities due to travel constraints, most training projects have been suspended. If the current trend continues, the company's cash flows, and revenue would suffer. 

Financial overview of Q2 2022

Source: Company Filing

• In Q2 FY22 company posted revenue of CAD 814.9 million, climbed from CAD 704.7 million in the previous corresponding period (pcp). The surge was primarily driven by strong momentum from the Defense and Security segment.
• Gross profit was posted at CAD 227.6 million, jumped from CAD 191.0 million in Q2FY21, due to higher revenue, partially offset by higher cost of sales.
• The group’s operating income stood at CAD 39.2 million, as compared to CAD 28.2 million in Q2FY21. The quarter witnessed an increase in selling, general and administrative expenses coupled with higher research & development expense.
• The quarter turned profitable and reported a net income of CAD 17.2 million, as compared to a net loss of CAD 6 million in the previous corresponding period (pcp).
  

Valuation Methodology (Illustrative): EV to EBITDA 

Analysis by Kalkine Group

Stock recommendation 

CAE showed its mettle and resiliency by effectively confronting the uncertainties of COVID-19 while also taking resources to radically improve the Company for the future. The company continue to play offence during this period of disruption, as evidenced by its recent announcement of the proposed acquisition of Sabre's AirCentre business, which marks its ninth accretive acquisition since the pandemic began. As business conditions continue to improve further, the company look to extend this posture as it relates to both organic and inorganic growth investment. Moreover, the group witnessed improved order backlog and free cash flows, even in this depressed environment, is a big positive. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 32.82 as on January 11, 2022. We have considered TransDigm Group Inc, Textron Inc, Mercury Systems Inc. etc. as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

Technical Summary Analysis

One-Year Technical Price Chart (as on January 11, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Enghouse Systems Limited 

Enghouse Systems Limited (TSX: ENGH) is a Canada-based provider of software and services to a variety of end markets. The group's operations are organized into two segments, namely the Interactive Management Group and the Asset Management Group. 

Key highlights

• Expanding territories through acquisition:The company acquired “Altitude”, which provides omni-channel contact centre solutions for small and large organizations, focusing on the business process outsourcing market segment. The acquisition of Altitude extends the presence to Portugal, expands its research and development footprint and further solidifies the operations in Spain, Brazil and Mexico enabling them to leverage additional sales opportunities within these markets.

• Improving operating matrix:Despite the turmoiled period in 2021, the Company maintained its pace and witnessed spirited performance across its gross margin, EBITDA margin, operating margin and net margin. The Company is continuously working closely with customers; thus, its presence is increasing along volume, which is appreciable. We believe the momentum to continue in the foreseeable future, as the Company had big capital investment plans to support future growth.

          Source: REFINITIV, Analysis by Kalkine Group

• Minimizing debt on sequential basis: On the back of robust business and healthy cash flows the company is able to decrease its debt burden on the sequential basis, which is a key positive. Reduction in debt enhances the financial flexibility of the firm. Notably, at the end of Q4FY21, the company reported its long-term debt of CAD 17.7 million, which is the lowest in the last five quarters. Also, its debt-to-equity ratio stood at 0.06x in Q4 2021, lower than the industry median of 0.16x.

                 Source: REFINITIV, Analysis by Kalkine Group

• Industry beating margins: The management’s solid determination helped them leap the industry median margins on many fronts in Q4 2021, which is a key positive. The chart below gives a glimpse of this.

                 Source: REFINITIV, Analysis by Kalkine Group

Risks associated with investment

The company offers several IT-related services, and the products require constant innovation to remain competitive within the industry. Thus, the arrival of any new players with attractive proposition would lead to price competition, which might hinder the company’s margin and client-base. 

Financial overview of FY 2021

Source: Company Filing

• In FY 2021, the company posted revenue of CAD 467.1 million, compared to revenue of CAD 503.7 million in the previous corresponding period, the lower revenue was mainly due to decreased hosted and maintenance revenue as well as lower software revenue.
• The result from operating activities stood at CAD 155.2 million, against CAD 162.0 million in FY2020, partially supported by lower operating expenses (CAD 182.3 million V/s CAD 196.5 million).
• Income before income taxes was reported at CAD 107.4 million, significantly lower than CAD 121.7 million in pcp. The year marked higher foreign exchange losses and higher other expense.
• Net Income for the period stood at CAD 92.7 million compared to CAD 98.5 million in FY2020.
  

Valuation Methodology (Illustrative): EV to Sales

Analysis by Kalkine Group 

Stock recommendation 

Fiscal 2021 was another year of positive income and operating cash flows. The group has reported improving operating matrix on the sequential basis as well as it kept minimizing its long-term debt and reported long term debt of CAD 17.7 million, which is at the lowest rank compared to last five quarters. Moreover, an acquisition of Portugal based BPO company Altitude Software is likely to deliver improved business prospects in the coming quarters through its modular software suite, which supports all media channels through its strong inbound and outbound capabilities for both on-premises and hosted contact centre activities. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 43.81 on January 11, 2022. We have considered Lightspeed Commerce Inc, Kinaxis Inc, Open Text Corp, etc. as the peer group for the comparison.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. 

  Technical Summary Analysis

One-Year Technical Price Chart (as on January 11, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Badger Infrastructure Solutions Ltd

Badger Infrastructure Solutions Ltd (TSX: BDGI) is North America's provider of non-destructive excavating services. Its key technology is the Badger Hydrovac, which is used primarily for safe excavation around critical infrastructure and in congested underground conditions. 

Key highlights 

• Strong guidance on upcoming years: The organization's goal is to achieve long-term sustainable growth. In addition, it plans to increase sales and Adjusted EBITDA in the United States by 15% on average over the next 3-5 years. It also targets for a yearly Adjusted EBITDA margin of 28% to 29%, with monthly revenue reaching CAD 30,000 per truck (mixed currency).

• Sequentially expanding liquidity ratios: In Q3 FY21, the company continued its momentum and saw sequential improvement in its liquidity ratio, demonstrating that the company is working hard to strengthen its liquidity. The company's quick ratio was 1.40x during the reported period, compared to the industry median of 1.41x, and its current ratio was 1.50x, which was in line with the industry median.

Source: REFINITIV, Analysis by Kalkine Group

• Improving cash collection cycle: On September 30, 2021, 90% of Badger's trade receivables were of 90 days or less, compared to 77% on December 31, 2020. The Company continues to manage its receivables portfolio and improve all aspects of the cash collection cycle. The implementation of auxiliary credit and collections systems has resulted in improved accounts receivable collection metrics.

• Industry beating margins: Despite the turmoiled period due to Covid-19 Pandemic, the Company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management’s solid determination helped them leap the industry median margins on many fronts in Q3 FY21, which exhibits the competitive advantage of the company within the industry. The chart below gives a glimpse of this.

Source: REFINITIV, Analysis by Kalkine Group

Risks associated with investment

Further restrictions by the government might lead to delay in project execution. Moreover, liquidity crunch in the overall economy may impact the trade and other collections. Other risk involved with the company is of foreign exchange risk as it derives significant revenues from the US. 

Financial overview of Q3 FY21 (In thousands of CAD)

Source: Company Filing 

• In Q3 FY21, the company reported revenue of CAD 171.8 million against CAD 156.9 million in the previous corresponding period. An increase in the revenue was mainly due to healthy contribution from the U.S operations.
• The company posted gross profit of CAD 47.0 million, against CAD 56.2 million in pcp. The decline in gross profit was mainly due to higher direct cost which stood at 72.7% of revenue compared to 64.2% in the previous corresponding period.
• Operating profit stood at CAD 18.2 million, against a profit of CAD 22.6 million in pcp.
• The company posted net profit of CAD 12.4 million compared to a profit of CAD 16.2 million in pcp, primarily due to above stated reasons, partially supported by lower income tax.
  

Valuation Methodology (Illustrative): EV to EBITDA

Analysis by Kalkine Group

Stock recommendation

Badger's revenue grew year over year from the first half of the year in the third quarter. Individual regions and clients are regaining ground as well, as they have been since the second quarter. As market activity levels climbed in both Canada and the United States, gross margins increased, which is a considerable gain. The company is focused on increasing revenue growth and returning to previous margin levels in order to achieve profitable, long-term, and sustainable growth. Furthermore, the company intends to boost sales in the United States over the next 3 to 5 years, with annualized Adjusted EBITDA margins of 28% to 29%, which is a significant plus. Therefore, based on the above rationales and valuation, we recommend a “Speculative Buy” rating at the closing price of CAD 31.65 on January 11, 2022.  

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

 Technical Summary Analysis

One-Year Technical Price Chart (as on January 11, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Silvercorp Metals Inc

Silvercorp Metals Inc (TSX: SVM) is a profitable Canadian mining company producing silver, lead, and zinc metals in concentrates from mines in China. The Company’s goal is to continuously create healthy returns to shareholders through efficient management, organic growth, and the acquisition of profitable projects.

Key highlights 

• Strategy to Support Quality Growth: The company will acquire projects that can generate cash flows of more than USD 50 million with reasonable capital. Additonally, the company has planned construction of new 3000 tpd flotation mill thereby increasing its capacity to approx. 5000 tpd to support its diversification strategy.
  

• Growing Asset Base: The company is growing its existing assets base organically through 350,000+ metres drilling campaign during FY2022. In lieu of this, the company is targeting new unexplored areas of Ying mine for metals like silver, lead and zinc etc. Furthermore, the company is focusing on unexplored drilling areas to target potential gold mineralization structures.
  

• Increased Production Mining and Milling Data: The company has mined 292,468 tonnes of ore in Q2 2022, up by 9% as compared to 267,853 tonnes in Q2 2021. Further production of Ore milled is 271,816 tonnes in Q2 2022, up by 3% as compared to 263,933 tonnes in Q2 2021.
  

Source: Company Reports

• Exploration and Development: During Q2 2022, the company has completed diamond drilling activity of 124,544 metres carrying worth of USD 6.2 million. Out of which, around USD 2.4 million of underground drilling expensed under the mining cost and approximately 32,574 metres or USD 3.8 million worth of drilling were capitalized in current quarter.
• All in Sustaining Guidance: In Q2 2022, the company has all-in sustaining cash production cost per tonne of Ore is USD 140.27 which is increased by 12% as compared to USD 124.47 in Q2 2021, However these numbers are within the range of Company’s current annual cost guidance.
  

Risks associated with investment 

The Company's business is subject to several risk factors, including the risk of labour cost, projects cost to improve productivity, climate related risks, government policies and COVID 19 risk which directly impacts the productivity of the company. 

Financial overview of Q2 FY2022 (In thousands of USD, excepts per share amounts)

Source: Company’s Filings 

• Company’s Revenue in Q2 2022 of USD 58.4 million, up by 4% as compared to USD 56.4 million in Q2 2021, primarily due to increase of USD 4.7 million from the increase in net realized selling metal prices of gold, lead, and zinc. Fluctuation in sales revenue was mainly due to change in metal prices, an overview of change in prices is given below.

Source: Company Filings 

• The company has strong balance sheet with USD 221.1 million of cash and cash equivalents and short-term investments which is up by USD 6.7 million as of September 2021 as compared to USD 214.4 million as of June 30, 2021.
• Net income of the company attributable to equity shareholders is USD 9.4 million in Q2 2022 as compared to USD 15.5 million in Q2 2021. The decrease of net income is primarily because of an unrealized loss of USD 4.1 million on investments in the current quarter compared to a gain of USD 2.8 million in the prior year quarter i.e., Q2 2021.
  

• In Q2 2022, the Cash flow from operations of the company is USD 30.9 million, up by 4% or USD 1.3 million as compared to USD 29.6 million in Q2 2021, due to gain on sale of investments and reduction in Income tax expenses.
  

Valuation Methodology (Illustrative): EV to EBITDA based Valuation Metrics

Analysis by Kalkine Group 

Stock recommendation 

The Company’s goal is to continuously create healthy returns to shareholders through efficient management, organic growth, and the acquisition of profitable projects. The company has reduced its long-term portion of lease obligations down to USD 0.75 million as of September 2021 as compared to USD 1.08 million as of March 2021. Hence it is reducing its obligations while maintaining higher operating cash flows for future opportunities. Therefore, based on the above rationale and valuation, we recommend a “Buy" rating on the stock at the closing price of CAD 4.53 as on date 11^th January 2022. 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Summary Analysis

One-Year Technical Price Chart (as on January 11, 2022). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.