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

Key Updates:

• Improved profitability on Q-O-Q basis: The company reported its gross margin and EBITDA margin of 28.6% and 20.4%, respectively in Q3FY22, which improved than 27.9% and 18.8% in Q2FY22. An improved margin denotes higher operational efficiency. Additionally, the company reported its net margin of 3.3% in Q3FY22, as compared to 2.1% in Q2FY22.
  

• Collaboration with Joby Aviation Inc.: The company recently collaborated with Joby Aviation Inc. which is a California -based company developing all-electric aircraft for commercial passenger service. With the above collaboration the group would develop and qualify flight simulation training devices that will be used to train the future pilots of Joby's revolutionary all-electric aircraft.
  

• Growth in Backlog: At the end of Q3FY22, the company reported its backlog of CAD 9,177.2 million, which increased 17% on y-o-y basis. A higher backlog indicates higher future revenue and is a key positive. The growth was supported by strong momentum from the defense segment.

• Management Update: Recently, the company announced the appointment of Patrick M. Shanahan as a new member of CAE's Board of Directors.
  

Risks Associated with the Investment:

Imposition of further restriction would dampen the demand for air-travel globally and would subsequently lead to lower traction from its Civil Aviation Training Solutions. 

 Q3FY22 Financial Highlights:

Q3FY22 Income Statement Highlights (Source: Company Report)

• CAE announced its quarterly result, wherein the company posted its income of CAD 848.7 million, improved from CAD 832.4 million in pcp. The growth was primarily driven by an impressive performance from the Defence and security segment, partially offset by sluggish performance form the Civil Aviation Training Solutions segment.
• Cost of sales stood at CAD 606.2 million, which is at par with CAD 603.5 million in pcp. Gross profit stood higher at CAD 242.5 million, as compared to CAD 228.9 million in pcp, thanks to the increased topline.
• The quarter was marked by higher selling, general & administrative expenses coupled with a surge in the restructuring, integration and acquisition costs, partially offset by lower research and development expenses. Operating income slide to CAD 65.5 million from CAD 82.9 million in pcp.
• The company reported its net income at CAD 28.4 million, as compared to CAD 49.7 million in pcp, due to lower operating income coupled with slightly higher finance expense and an inclusion of income tax.
  

 Valuation Methodology (Illustrative): EV to Sales-based

Analysis by Kalkine Group

Stock Recommendation:

CAE has already delivered stronger financial performance, expanded and optimizing its position, and booking substantial orders, which indicates revival in the demand dynamics. Within the Healthcare segment, the outlook remains bright, as it gains share in the healthcare simulation and training market and focuses on achieving greater scale. The stock has been valued by using the EV to Sales based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like BWX Technologies Inc, Curtiss-Wright Corp etc., for the purpose. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 33.38 on April 21, 2022.

One-Year Technical Price Chart (as on April 21, 2022). Source: REFINITIV, Analysis by Kalkine Group

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