CAE Inc

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 Highlights:

• Impressive margin profile: The company reported a higher margin than the industry median, which indicates improved operational efficiencies. EBITDA margin and operating margin stood at 18.7% and 11.5%, respectively, higher than the industry median of 13.3% and 8.3%, respectively. Net margin stood higher at 6.3%, as compared to the industry median of 6%.
• Ample Liquidity: At the end of Q1FY21, the company reported available liquidity of CAD 2.6 billion, which includes cash and cash equivalent of CAD 690.5 million. This seems to be sufficient to fund the company’s short-term and long-term capital needs. Furthermore, the company is regularly monitoring its cash inflows and outflows in order to ensure capital adequacy and efficient use of cash resources. The company further suspended its dividend distribution and share repurchase program in order to support the liquidity.
• Innovative Offerings: The company is focusing on offering innovative, consumer-friendly products in order to retain its market share. Some of the recent updates are listed below:
  3. Launched Vimedix 3.2, which is an advanced technology and industry’s first ultrasound simulator with 3D/4D ultrasonography and multiplanar reconstruction, would be used to improved fidelity and realism.
  4. The company also launched a digital portfolio of learning solutions named CAE ICCU, which would cater to the critical-care clinicians for ultrasound education.
  5. The group also launched several new clinical digital learning courses focusing on treating COVID-19 related topics for intensive care units and related departments.

Q1FY22 Financial Highlights:

• CAE declared its quarterly results, wherein the company posted revenue of CAD 752.7 million, climbed from CAD 550.5 million in the previous corresponding period (pcp). The surge was primarily driven by strong momentum from the Civil Aviation Training Solutions segment coupled with an impressive performance from the healthcare segment.
• Gross profit was posted at CAD 213.8 million, jumped from CAD 108.0 million in Q1FY21, due to higher revenue, partially offset by higher cost of sales.
• The group’s operating income stood at CAD 86.2 million, as compared to an operating loss of CAD 110.3 million in Q1FY21. The quarter witnessed an increase in selling, general and administrative expenses coupled with the inclusion of other gains, as compared to other losses.
• The company turned profitable and reported a net income of CAD 47.3 million, as compared to a net loss of CAD 110.0 million in the previous corresponding period (pcp).

Q1FY22 Income Statement Highlights (Source: Company Report)

Risk: The group derives a major part of the revenue from the aviation industry, and travel restrictions would be impacting the group’s performance.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company is focusing on important enhancements across its global sales organization to drive increased growth and accelerate market expansion, which looks promising. In the recent past, the company witnessed a revival within the healthcare segment and witnessed growth throughout its portfolio, primarily from patient and ultrasound simulators. We have valued the stock using Price to CF based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered peers like Air Lease Corp, Exchange Income Corp. etc. Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 34.38 on August 19, 2021.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on August 19, 2021). Analysis by Kalkine Group

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

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