CAE Inc

CAE Inc (TSX: CAE) is a global company focused on delivering training for the civil aviation, defence, 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

• CAE Inc. closes marketed public offering: Recently, the company completed its previously announced underwritten marketed public offering of common shares in the United States and Canada. The company issued 10.45 million shares at a price of USD 27.50 per share for gross proceeds of approximately USD 287 million (approximately CAD360 million). 

• Acquiring L3Harris Technologies' military training business:  Recently, the company entered into a definitive agreement with L3Harris Technologies (NYSE: LHX) to acquire L3Harris' Military Training business for USD 1.05 billion. The closing of the acquisition is expected in the second half of 2021. The proposed acquisition represents a significant value creation opportunity. It would accelerate the company's growth strategy in Defence and Security and is highly complementary to its core military training business. It would further broaden its position in the United States. 

• Ample liquidity: On December 31, 2020, the company holds total available liquidity of approximately CAD 2.4 billion, including CAD 619.9 million in cash and cash equivalents, and undrawn amounts on its revolving credit facility. The proceeds from the equity offering increased its available liquidity compared to the prior quarter. We believe that current liquidity along with cash generated from the operations would be sufficient to meet the requirements over the foreseeable future. 

Financial overview of Q3 2020

Source: Company

• In Q3 2020, the company posted revenue of CAD 832.4 million, as compared to CAD 923.5 million in the previous corresponding period (pcp). The decline was due to a lower income generated from Civil Aviation Training Solutions and Defence and Security by CAD 145.9 million and CAD 33.1 million, respectively, partially offset by an increase of CAD 87.9 million for Healthcare.

• The group’s operating profit slide to CAD 82.9 million, from CAD 154.9 million in Q3FY19. The decrease was mainly due to a lower gross profit combined with restructuring costs amounting to CAD 14.3 million.

• The company reported a net income of CAD 49.7 million, compared to a net income of CAD 99.8 million in the previous corresponding period (pcp), slightly supported by an income tax recovery.

Risks associated with investment

The group derives majority of the revenue from the aviation industry, and due to the ongoing lower activity on account of travel restrictions, most of the training programs were halted, which has impacted the company’s order flow. Continuation of the above trend would lead to a decline in cash flows and the company’s income levels.

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock recommendation

The Company expects a stronger second half of FY21, compared with the first half, and expects a positive free cash flow for the entire fiscal year, which is encouraging considering the current economic scenario. The Company is acquiring L3Harris' Military Training business which would accelerate its growth strategy in Defence and Security and further broaden its position in the United States. Furthermore, it sees opportunities in the healthcare business, including its new digital and virtual learning products. Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 34.85 as on March 16, 2021. We have considered Air Lease Corp, BWX Technologies Inc, Curtiss-Wright Corp, etc. as the peer group for the comparison.

1-Year Price Chart (as on March 16, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

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