CAE Inc (TSX: CAE) is a global company focused on delivering training for the civil aviation, defense, security, and healthcare markets. The company's training solutions are provided through products and services. Moreover, a part of the revenues come from supplying aviation personnel on a lease, along with providing aviation support organizations. 

Key Highlights:

• Weak Margin profile: The company reported its operating margin and pretax margin of 8.4% and 4.6%, respectively, in FY22, as compared to the industry median of 9.3% and 7.1%, respectively. This indicates weak operational efficiencies and poor cost management. Moreover, the company posted a lower net margin of 4.4% in FY22, as compared to the industry median of 5.5%.

• Highly leveraged Balance Sheet: The company reported a higher D/E ratio of 0.76x in FY22, higher than the industry median of 0.35x. This indicates a lower financial flexibility and remains a key concern for the group. Moreover, the company reported a higher long-term debt to total capital of 39.3% in FY22, considerably higher than the industry median of 21.4%. This indicates higher balance sheet risk for the company.

• Weak Liquidity profile: In FY22, the company’s quick ratio and current ratio stood at 0.78x and 1.03x, respectively, lower than the industry median of 1.28x and 2.05x, respectively. This indicates that the company has higher current liabilities as compared to its current assets, reflecting a weak working capital management.

  Valuation Methodology (Illustrative): Price to CF-based

Analysis by Kalkine Group

Stock Recommendation:

The company reported a lower cash balance of CAD 346.1 million in FY22, as compared to CAD 926.1 million in FY21. This might lead to short-term liquidity crisis and is a key negative for the company. We have valued the stock using the Price to CF based relative valuation approach and arrived at a target price, which suggests a double-digit downside potential (in % terms). For the said purposes, we have considered industry (Aerospace & Defense) median on an NTM basis. Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of CAE at the last closing price of CAD 34.41 on June 02, 2022.

One-Year Technical Price Chart (as on June 02, 2022). Source: REFINITIV, Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

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