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.

Event Update: The Management announced that the third quarter FY21 result would be disclosed on February 12, 2021.

Key Highlights:

• New Contract wins: Recently, the group received an eight-year contract award from the United States Air Force (USAF) for comprehensive KC-135 training services. The above contract is valued at USD 275 million. Notably, the group became the prime contractor on the USAF KC-135 Training System program in 2010 and has won the competition.
• Ample liquidity and prudent capital management: The company reported impressive liquidity levels of CAD 2 billion, which includes CAD 258 million of cash and cash equivalents, and undrawn revolving credit facility, which seems to be sufficient to withstand the current pandemic. Moreover, the management would introduce and implement new digitally enhanced processes, which would optimize real estate costs, asset relocations and other direct costs as per the demand for certain products and services. The above cost optimization strategy is expected to save ~CAD 100 million in the next two financial year.

Q2FY21 Financial Highlights:

• CAE declared third quarterly results, wherein the company posted revenue of CAD 704.7 million, as compared to CAD 896.8 million in the previous corresponding period (pcp). The decline was due to a lower income generated from both products and training & services.
• Gross profit was posted at CAD 191 million, declined from CAD 236.7 million in Q2FY20, primarily attributable to lower revenue, partially supported by a lower cost of sales.
• The group’s operating profit slide to CAD 28.2 million, from CAD 124.8 million in Q2FY20. The decrease was mainly due to a lower gross profit combined with the inclusion of restructuring costs amounting CAD 51.1 million.
• CAE reported net income of CAD 6 million, as compared to a net income of CAD 75 million in the previous corresponding period (pcp), slightly supported by an income tax recovery of CAD 1 million, versus CAD 15.5 million in pcp.
• Cash and cash equivalents stood at CAD 258 million, while total assets were recorded at CAD 7,441.6 million.

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risk: The group derives majority of the revenue from the aviation industry, and due to the ongoing lower operations 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 expect a stronger second half of FY21, as compared with the first half, and also expects a positive free cash flow for the entire fiscal year, which is encouraging considering the current economic scenario. The stock of CAE appreciated 30% and 51% in the last three months and six months, implies a relative strength in the stock. We have valued the stock using EV to Sales based relative valuation approach and arrived at a target price offering double-digit upside (in % terms). We have considered peers like Calian Group Ltd, Air Lease Corp etc. Hence, considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 29.92 on January 22, 2021.

CAE Technical Chart (as on January 22^nd, 2021). Source: Refinitiv (Thomson Reuters)

SNC-Lavalin Group Inc.

SNC-Lavalin Group Inc. (TSX: SNC) is an integrated professional services and project management company which offers service like financing, consulting, engineering and construction, procurement, and operations and maintenance. The company has customers from businesses like resources, infrastructure, nuclear, and engineering design and project management industries.

Key Updates:

• On January 12, 2020, the group announced the recipient of USD contract by Coeur Rochester, Inc., amounting CAD 30 million, wherein the group would provide construction management services for the Plan of Operations, Amendment Number 11 expansion project. As per the management, the contract is expected to complete by the end of FY22.
• Recently, the group confirmed one-year extensions of two existing contracts from one of its existing clients named Bruce Power. SNC would continue to provide fuel channel inspection, and tooling maintenance and refurbishment in support of their reactor inspection and maintenance.
• On December 17, 2020, the company reported that it would provide modular social housing solution jointly with PABAGO located in the United Kingdom. The project was valued at £47 billion.

Q3FY20 Financial Highlights:

• SNC declared its quarterly results, wherein the group posted revenue of CAD 2,005.732 million, lower than CAD 2,432.163 million in the previous corresponding period (pcp). The decline was primarily attributable to a decline in income from SNCL projects and capital projects.
• At the end of the third-quarter 2020, the group reported CAD 1.4 billion of recourse debt and CAD 0.4 billion of limited recourse debt as on September 30, 2020.
• Cash and cash equivalent stood at CAD 1.1 billion, while reported an additional of CAD 2 billion of revolving credit, would support the company’s liquidity.
• The group reported a net loss of CAD 85.125 million, as compared to a net profit of CAD 2,756.714 million in Q3FY19.                                

Q3FY20 Income Statement and Segment Highlights (Source: Company Reports)

Risks: Further breakout of the COVID-19 would weigh on the group’s operations and backlog. Moreover, the group expects revenue from SNCL Engineering Services to decrease by a low to mid-single-digit in Q4FY20.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock Recommendation:

The group mentioned that Engineering Services business continued to deliver solid results in the quarter, supported by strong performance in the transportation, defence and nuclear markets in our core regions. The transformation of the Resources Services business is on track as the group move quickly to restructure and reduce overhead costs and look forward to additional positive EBIT from this business in 2021. Further, As at September 30, 2020, the company had CAD 1.1 billion of cash and cash equivalents. The Company also has an additional CAD 2.0 billion available under its revolving credit facility. We have valued the stock using EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered WSP Global Inc, Stantec Inc and Aecon Group Inc etc., as the peer group. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 22.96 on January 22, 2021.

SNC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Spin Master Corp

Spin Master Corp (TSX: TOY) is a Canada-based children’s entertainment company which creates, designs, manufactures, and markets a portfolio of toys, games, products, and entertainment properties. The company’s operating regions are North America, Europe, and Rest of World.

Key highlights

• Executive leadership succession:The Company has appointed Max Rangel as a Global President effective January 2021 and will assume Global President and CEO's position in April 2021.

• Acquisition of Rubik's Cube: On 5th January 2021, the Company announced that it had completed the world-famous Rubik's Cube acquisition. We further believe that with this acquisition, the Company would continue the Rubik's brand legacy, with plans for further innovation across the entire Rubik's portfolio and expanded distribution through the Company's global footprint, which will boost the business of the Company in many ways.

• Increase in Free Cash Flow:In the latest quarter, the company improved its free cash flows, which stood at USD 96.0 million compared to USD 86.5 million. An increase in Free cash flow was primarily due to lower inventories and lower trade receivables, which means that the company is blocking less inventory and is making collections from trade receivables.

• Repaid debts: During the quarter, the company repaid the balance of USD 300 million, previously outstanding on its Credit Facility, after which, the Company had cash on hand of USD 207.3 million.

• E-commerce is the next big story:The company saw a strong wave in Q1 and Q2 of FY2020 from e-commerce. In Q2, the company produced approximately 25% of the total sales through e-commerce channels and during Q3 2020, sales from e-commerce channels rose by 65%. The management expects this trend to continue into Q4 2020 also, as they believe that they are growing e-commerce faster than many of its competitors.

Financial overview of Q3 2020

Source: Company 

• In Q3 2020 the company posted revenue of USD 571.6 million increased by 4.3% from USD 548.1 million in the previous corresponding period. The increase in revenue was primarily driven by higher other revenue and Gross Product Sales.
• Gross profit stood at USD 277.9 million in Q3 2020, compared to USD 286.9 million in Q3 2019. The decline in gross profit was primarily due to higher cost of sales.
• Higher Administrative expenses and losses on Foreign exchange coupled with a higher cost of sales dragged the company's net income in Q3 2020 which stood at USD 86.8 million, compared to USD 92.2 million in Q3 2019, partially offset by lower income tax. 

Risks associated with investment

The company is exposed various risks which include disruption in customer behaviour and consumer demand, and disruption in the supply chain. Other than this any further government-imposed restrictions and the closure of retail location could reduce the consumer traffic, which could affect the group's financials.

Valuation Methodology (Illustrative): Price to Cash Flow 

All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The unlocking process post the mandatory lockdowns lend support to the group’s business. The company's multi-platform portfolio, including traditional toys, entertainment properties, and digital toys, is likely to drive revenues in the coming quarters. The company's financials are also improving gradually, with substantial growth reported in the top-line and a turnaround from loss to profit on a sequential basis. With a healthy balance sheet with USD 207.3 million in cash and cash equivalents, low debt, and improving free cash flows reflects the company's strength. Therefore, based on the above rationale and valuation, we have given a "Buy" rating at the closing price of CAD 28.73 on January 22, 2021. We have considered Corus Entertainment Inc, Great Canadian Gaming Corp, Mattel Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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