CAE Inc.

Challenging Macros to Hinder Near-term Liquidity: CAE Inc. (TSX: CAE) is a global leader in training for civil aviation, defence & security, and healthcare. The company has more than 160 training locations across more than 35 countries. The company operates through three major segments, namely, Civil, Defence and Healthcare.

To remain afloat amid CoVID-19 outbreak, the company recently announced that it has temporarily suspended the payment of dividend and share repurchase program. The company also lowered its R&D expenses and CAPEX spend. Also, it has announced temporary layoffs of 2,600 employees, while another 900 employees are placed under reduced work-week. CAE announced salary freezes and salary reductions for employees who aren’t affected by the reduced work-week. Besides, CEO and executive team salary is reduced by 50%, 30% for vice presidents, 20% for directors and managers, and 10% for group leaders.

Q3FY19 Financial Highlights: For the period ended December 31, 2020, CAE posted revenue of CAD 923.5 million, reflecting a 13% growth over Q3FY18. The increase was driven by robust growth within the Civil and healthcare segments followed by a sustained momentum in the defence solutions. Operating profit stood higher at CAD 154.9 million, as compared to CAD 113 million in the previous corresponding period along with margin expansion (16.8% vs 13.8%). The growth was majorly aided by solid operating income growth from Civil and Defence segments driven by innovative and comprehensive training solutions and healthy order book. Net income stood at CAD 99.8 million, as compared to CAD 79.5 million in the previous corresponding period. The company reported a higher free cash flow of CAD 275.3 million, as compared to CAD 155.1 million in the previous corresponding quarter due to higher cash provided by operating activities and comparatively lowers capex expenditure.

Q3FY19 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of CAE corrected ~43% and ~38% in the last three months and nine months, respectively. The stock is trading at the lower band of its 52-weeks trading range of CAD 42 and CAD 14.26. The company derives more than one-third of its income from US territory and hence we expect a temporary blip in its top-line as US has become the new epicentre for COVID-19 cases. Moreover, a major chunk of the income comes from the aviation sector, and we expect significant cut down in the budget by the airlines companies due to the ongoing travel restrictions around the world. CAE offers training and development programs to different industries and has shown a consistent growth over the years driven by improved order book and innovative product offerings. The company announced drastic cost-cutting measures to survive the current crisis. However, given the persisting challenges in the aviation industry and uncertainty ahead, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 21.88, up 9.83% as on April 17, 2020.

CAE Daily Price Chart (Source: Thomson Reuters) 

Exchange Income Corporation

Low Demand to Hurt Financials: Exchange Income Corporation (TSX: EIF) is a diversified, acquisition-oriented corporation focused on opportunities in aerospace and aviation services and equipment, and manufacturing activities. The company operates through two major segments, namely, Aerospace & Aviation and Manufacturing.

The company foresees lower demand within the Aerospace & Aviation segment as the air traffic has reduced drastically on account of the outbreak of COVID 19. The maritime surveillance operations remain unaffected and are expected to report improved numbers in coming quarters. As highlighted by the company, its Regional One performance will be impacted due to the lower demand from the airline industry. EIF continues its operation within its manufacturing segment, which could shut down temporarily due to the pandemic.

The company announced a monthly dividend of CAD 0.19 per share, payable on May 15, 2020. Meanwhile, the company paid a cash dividend of CAD 72.74 million in FY19, higher from CAD 68.46 in FY18.

FY19 Financial Highlights: EIF came up with an impressive set of number wherein the company posted revenue of CAD 1341.37 million, as compared to CAD 1,203.39 million in the previous financial period. The increase was driven by decent growth from both the segments. Operating income soared to CAD 328.81 million from CAD 277.77 million in FY18, thanks to the decent top-line growth. The quarter was marked by higher Depreciation costs and inclusion of depreciation of right of use assets and Interest expense on the right of use lease liabilities of CAD 22.50 million and CAD5.04 million, respectively. The company reported its net earnings at CAD 83.63 million, stood higher from CAD 70.70 million in FY18, due to improved EBITDA. Investments on capital asset stood at CAD 250.55 million, higher from CAD 186.72 million in the previous financial year.

FY19 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The stock of EIF is quoting at CAD 23.08 with a market capitalization of CAD 796.98 million. On account of the COVID 19 crisis and significant lower air-traffic, the stock fell ~49% in the last three months. The company derives the majority of its revenue from the Airline segment which operates within North America.  Due to the ongoing safety measures, the airline companies are experiencing a major tailwind on account of substantial fall in passenger traffic. We believe, the company’s operating performance is likely to take a toll due to the prevailing restriction. During FY19, the company reported a free cash flow of CAD 245.77 million, improved from CAD 223.363 while maintains enough liquidity to sail through the challenging circumstances. We believe that the current scenario is not favorable for the airline industry and we remain skeptical in the short-term and would like to wait for scenario to improve. Hence, we recommend a “Watch” stance on the stock at the Closing market price of CAD 23.08 as on April 17, 2020.

EIF Daily Price Chart (Source: Thomson Reuters)

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