CAE Inc

CAE Inc (TSX: CAE) is a global company focused on delivering training for the civil aviation, defence, 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 

• Acquiring L3Harris Technologies' military training business:  Recently, the company signed an agreement to purchase L3Harris Technologies' Military Training business for USD1.05 billion from L3Harris Technologies (NYSE: LHX). The acquisition is scheduled to close in the second half of 2021. The planned merger offers a huge incentive for value generation. It has the potential to boost the company's growth strategy in Defense and Security which is highly complementary to its core military training business. It would further broaden its position in the United States. 

• Stable free cash flows: For FY 2021, the company garnered free cash flow of CAD 346.8 million slipped by CAD 4.4 million compared to last year mainly due to a decrease in cash provided by operating activities, partially offset by lower dividends paid as a result of the suspension of common share dividends, lower maintenance capital expenditures. 

• Healthy Order intake in Defence & Security segment: In Q4 2021, the company posted 34% rise in the order intake to CAD 370.4 million, compared to CAD 276.6 million in the previous corresponding period. The Defence book-to-sales ratio stood at 1.11x for the quarter and 0.91x for the last 12 months, while the Defence backlog, including options and CAE's interest in joint ventures, at the end of the year stood at CAD 3,908 million. 

• Ample liquidity: On March 31, 2021, the company holds total available liquidity of approximately CAD2.7 billion, including CAD 926.1 million of cash and cash equivalents. The current liquidity position seems to be sufficient to fund the operations over the foreseeable future. 

 Financial overview of FY 2021

Data Source: Company 

• In FY 2021, the company’s annual revenue decreased 18% to CAD 2,981.9 million compared to CAD 3,623.2 million in the previous corresponding period (pcp). The lower revenue was due to a lower income generated from Civil Aviation Training Solutions and Defence and Security by CAD 754.6 million and CAD 114.1 million, respectively, partially offset by an increase of CAD 227.4 million for Healthcare.
• The group’s operating income slides to CAD 48.4 million, from CAD 537.1 million in FY2020. The decrease was mainly due to a lower gross profit combined with restructuring costs amounting to CAD 124.0 million.
• On the back of above discussed rationales, the company reported a net loss of CAD 47.5 million, compared to a net income of CAD 318.9 million in the previous corresponding period, slightly supported by an income tax recovery. 

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, affecting the company's order flow. If the current trend continues, the company's cash flows, and revenue would suffer. 

Valuation Methodology (Illustrative) 

Stock recommendation 

Over the fiscal year, CAE showed its mettle and resiliency by effectively confronting the uncertainties of COVID-19 while also taking resources to radically improve the Company for the future. The group identified highly strategic growth opportunities, introduced innovative digitally powered technologies and software innovations, innovated business processes, and structurally reduced our cost base, allowing it to achieve higher growth and profitability than ever before in the years ahead. In addition to having plenty of cash on hand, the firm is buying L3Harris' Military Training business, which will help it strengthen its Defense and Security development strategy and expand its reach in the United States.

Therefore, based on the above rationale and valuation, we recommend a "Buy" rating at the closing price of CAD 35.92 as of May 21, 2021. We have considered Air Lease Corp, Cargojet Inc, Calian Group Ltd. etc as the peer group for the comparison.

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

1-Year Price Chart (as on May 21, 2021). Data Source: REFINITIV

Aecon Group Inc

Aecon Group Inc (TSX: ARE) is a diversified Canada-based construction company that operates in two major segments, namely, Construction and Concessions. The group provides integrated solutions to leading private and public-sector clients through its Construction segment across the Civil, Urban Transportation, Nuclear, Utility and Industrial sectors.

Key Updates:

• An income Play: ARE has a solid history of stable dividend payment despite several economic cycles, which indicates business resiliency. Dividend distribution during Q1FY21 stood at CAD 9.6 million, higher than CAD 8.8 million in Q1FY20. Notably, the stock of ARE carries a dividend yield of ~3.831%, which looks decent considering the current interest rate scenario.

Ten Years Dividend History (Source: REFINITIV)

• Diversified Revenue generations depict operational resiliency: The company has a balanced portfolio and is less dependent on a particular revenue stream, which is a key positive. Moreover, ARE has an extensive capability across different stages of the value chain, which are in sync with the global objective of low carbon emission norms, which is a key positive. Moreover, future growth is expected from small modular reactors and waste management segments, telecommunications, and alternative energy and industrials segments.

Data Source: Company

• New Project Win: On May 20, 2021, the company reported a project win of CAD 729.2 million from the Eglinton Crosstown West Extension (ECWE) Advance Tunnel project in Toronto. The company would design and construct of launch and extraction shafts, tunnels and headwalls, the installation of precast concrete tunnel liners, as well as other ancillary work. The above project is expected to commence this year, while the expected date of completion is in the second quarter of 2025.

Q1FY21 Financial Highlights:

• ARE announced its quarterly results, wherein the company posted revenue of CAD 754.030 million, as compared to CAD 747.515 million in the previous corresponding period (pcp).
• Gross profit slide to CAD 57.333 million, as compared to CAD 61.216 million in Q1FY20, due to higher direct costs and expenses (CAD 696.697 million v/s CAD 686.299 million in pcp.)   
• The group reported an operating loss of CAD 10.223 million, which widened from a loss of CAD 9.651 million a year ago. The quarter was marked by a slightly higher depreciation and amortization costs (CAD 22.848 million v/s CAD 22.781 million in pcp) while a lower marketing, general and administrative expense (CAD 47.691 million v/s CAD 50.380 million in pcp).
• Net loss for the period increased to CAD 18.411 million, v/s CAD 11.414 million, a year ago.
• The company reported a cash and cash equivalent of CAD 582.787 million, while total assets were recorded at CAD 3,154.685 million.

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Due to the current restrictions imposed by State and Provincial Governments on account of the COVID 19 pandemic, the group might witness a disruption within its ongoing projects.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

Due to the increasing consumer demand, the leading public and private industry players are increasing their capital expenditure across emerging businesses, and the group is well versed to take advantage of the opportunities arising from the segment.

Source: Company

We have valued the stock using P/E based relative valuation approach and arrived at a target price offering double-digit upside side potential (in % terms). We have considered industry (Industrials) mean on an NTM basis. Hence, considering the above-mentioned facts we give a ‘Buy’ rating on the stock of ARE at the last closing price of CAD 18.27 on May 21, 2021.

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

One-Year Price Chart (as on May 21, 2021). Source: Refinitiv

Disclaimer

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