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

• 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).

• Sequentially improving operating margins: Despite the distressed time, the Company maintained its pace and witnessed the spirited performance across its annual recurring revenue, revenue and adjusted EBITDA. The Company is continuously working closely with customers; thus, its presence is increasing along volume, which is appreciable. 

Source: REFINITIV, Analysis by Kalkine Group 

• Secured free cash flows: Despite the difficult environment, the company's financials increased, indicating better operational efficiency. In the third quarter of 2022, the company achieved CAD 282.1 million in free cash flow, compared to CAD 224.0 million the previous corresponding period. The rise was mostly attributable to decreased non-cash working capital investment, which was somewhat offset by payments linked to the integration and acquisition expenses of its newly acquired businesses.

• Healthy Order intake: In Q3 2022, the company made outstanding progress on the order front, obtaining approximately CAD 1.4 billion in orders and finishing the quarter with a CAD 9.2 billion backlog and a book-to-sales ratio of 1.62 times. In the Civil division, it received CAD 753 million in orders, representing a 1.93 times book-to-sales ratio, which included long-term training agreements with airlines and business aircraft operators, as well as the sale of 19 full-flight simulators. In the defense sector, it received orders for training and mission support systems worth CAD 593 million, or 1.39-times book-to-sales. In Healthcare, the group's reenergized structure and creative solutions continued to achieve double-digit revenue growth.

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 Q3 2022

Source: Company Filing

• CAE announced its quarterly result, wherein it posted revenue of CAD 848.7 million, improved from CAD 832.4 million in pcp. The improvement was primarily driven by an impressive performance from the Defense and security segment, partially offset by sluggish performance form the Civil Aviation Training Solutions segment.
• Gross profit stood higher at CAD 242.5 million, as compared to CAD 228.9 million in pcp, thanks to the increased topline and stagnant cost of sales which stood at CAD 606.2 million, against CAD 603.5 million in pcp.
• 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. Therefore, operating income slipped to CAD 65.5 million from CAD 82.9 million in pcp.
• The company reported its net income at CAD 28.4 million, compared to CAD 49.7 million in pcp, due to lower operating income coupled with slightly higher finance.
  

Valuation Methodology (Illustrative): EV to Sales based multiple

Analysis by Kalkine Group

Stock Recommendation

The company posted strong performance in Q3 2022, where it delivered double-digit revenue growth, strong free cash flow, and a near doubling of order intake compared to the third quarter last year, all of which adds to the conviction in the path to a larger, more resilient, and more profitable CAE in the future. Most notably, the group made excellent progress on the order front with a book-to-sales ratio of 1.62 times, securing nearly CAD 1.4 billion in orders and concluding the quarter with a CAD 9.2 billion backlog.

Hence considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 30.35 on March 15, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on March 15, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

Disclaimer

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