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. The company's training solutions are provided through products and services. 

Recent Update:

Caisse de dépôt et placement du Québec (CDPQ) has purchased a stake in CAE amounting to CAD 150 million. CDPQ is  has a prominent presence across training and operational support in the civil aviation, defense and security and health care markets. As reported, CAE would deploy the fund towards potential future growth and acquisition opportunities.

Key Highlights:

• Revenue increased sequentially: CAE announced its quarterly results, wherein the company posted revenue of CAD 704.7 million, improved 28% sequentially. The group experienced sequential improvements in each of the three business segments. In Civil, revenue increased 47%, driven by 49% average training centre utilization and ten full-flight simulator deliveries. In Defence, revenue grew by 8%, and the group also began to see a more positive inflection, with operational improvements on programs and at training sites impacted by COVID-related restrictions. And in Healthcare, revenue grew by 66% compared to last quarter.
• Management is positive on the second half: The Company continues to expect a stronger second half of the fiscal year, compared with the first, including the generation of positive free cash flow for the fiscal year. The company significantly reduced capital expenditures, which it currently expects to be approximately CAD 100 million for the fiscal year. As global commercial and business aircraft activity recovers, the company expects to continue building on its previously positive momentum in training, increasing market share and securing new customer partnerships with its innovative training and operational solutions.
• Technical indicators are showing bullish trend: A bullish price trend appeared on the daily price chart, with stock traded above crucial short-term as we as long-term support level of 50-day and 200-day SMAs. More importantly, the short length 50-day is set to cross over long-term 200-day SMA, which is a bullish indicator, also known as a golden cross. Further, the MACD is rising and hovering above its 9-day SMA signal line, with the difference between 12-day, and 26-day EMAs is positive another bullish technical indicator.

Key Takeaways from Q2FY21 Results:

• CAE announced its quarterly results, wherein the company posted revenue of CAD 704.7 million, improved 28% sequentially, down 21%, a year ago.
• Operating profit stood at CAD 28.2 million, significantly lower than CAD 124.8 million in Q2FY20. The company’s operations witnessed higher activity levels in both commercial and business aviation markets as compared to the first quarter of FY21.
• The company posted its net loss at CAD 6 million, compared to a net income of CAD 75 million in the previous corresponding period (pcp).
• The company posted a reduction in the long-term debt at CAD 2,387.4 million, as compared to CAD 3,106 million in March 2020.

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risks: During the first half of FY21, the company’s Civil training revenues reported weak traction on account of lower demand due to a reduction in airlines' global operations, disruption to the global air transportation environment and diminished air passenger travel. Continuation of such trend would hinder the company’s overall performance.

Valuation Methodology (Illustrative): EV to Sales based

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months 

Stock Recommendation:

During the quarter, the company booked CAD 668 million in new orders for a 0.95 times book-to-sales ratio, which is impressive. Furthermore, the company expects a strong second-half performance and expects to generate positive free cash flow for FY21, which is commendable looking at the current downturn. The Management highlighted that despite a near-term operational challenge due to travel restrictions and quarantines, the long-term prospects of the company remain positive. We expect, with the gradual reopening of the global economy coupled with the removal of border restrictions, and smooth function of the supply chain segments, the overall performance is likely to improve in the foreseeable future. Moreover, the recent CDPQ transaction is likely to help the company's expansion plans, including the acquisition of Flight Simulation Company B.V., which will allow the group to grow its capacity to offer training services to customers in Europe, primarily airlines and cargo carriers. We have valued the stock using EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Air Lease Corp, Serco Group PLC etc. Hence, we recommend a 'Buy' rating on the stock at the closing market price of CAD 31.40 on November 16, 2020.

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

Gamehost Inc. (TSX: GH) operates hospitality and gaming properties. The company's segments include Gaming, Hotel, and Food & Beverage.

Key Highlight

• The Stock is Hovering in a Bullish Price Zone: At the last closing price of CAD 5.68 (on November 16, 2020), shares of GH traded well above the crucial long-term as well as short-term support levels of 200-day and 50-day SMAs. Also, its shares have registered a cross over recently and closed above the crucial long-term resistance of 200-day SMA, which is another positive trend.
• Strong Relative Strength: Over the last three months, shares of GH were edging higher and up by approximately 16%. The stock surged 33% in a month over period and traded approximately 3.2% higher in the past five trading sessions. More importantly, GH shares have strongly outperformed the benchmark index by ~ 19% in a month over period and slightly in 5-day trading session as well. This implies a relative strength in the stock.
• Margin Profile Outperformed the Industry: The company's reported EBITDA margin for the September quarter stood at 53.5% whereas industry median stood at 14.3%, the operating margin stood at 40.6% vs industry median of 5.4%, and Net Margin stood at 30.7% whereas industry median stood at 1.8%. Also, the company reported a positive return on equity of 2.9%, whereas the industry median is negative. This reflects the strength of the company's business model and competitive advantages the group has developed over the years.
• Positive Spread between ROCE and WACC: The company's LTM ROCE stood at 12% whereas the Weighted Average Cost of Capital stood at 9.9%, which implies a positive spread of 2.1%. A positive spread between ROCE and WACC is extra cash the company is generating for its shareholders, and also reflect prudent capital management by the company to generate higher returns.

Financial Highlights: Q3FY20

Source: Company Profile

• Operating revenue for the quarter was down 40.2% from the prior year to CAD 10.1 million.
• Shareholder profit for the quarter was down 23.7% from the prior year to CAD 2.9 million.
• Earnings before interest, taxes, depreciation, and amortization that is attributable to shareholders of the company ("EBITDA to Shareholders") was down 26.9% to CAD 4.9 million versus CAD 6.7 million in the year ago quarter.
• Further, the company's dividend remains temporarily suspended. A decision to reinstate the dividend in whole or in part will be reviewed at regular intervals by the board of directors.
• The company has CAD 30.0 million revolving credit facility of which CAD 5.2 million was available to be drawn at the end of the quarter.

Risk Associated with Investment: The company's business is significantly exposed to the next wave of COVID-19 outbreak, which may weigh on the group's performance. Also, a prolonged lower occupancy rate could dent the group's financials.

Stock Recommendation: Lifting lockdown restriction would benefit the company in the fourth quarter, also December is generally a good season for Casino and Hotels as people step out for Christmas and New Year celebration. Further, the company's financial position remains solid with adequate liquidity to easily go through this challenging business times. The company is profitable, and cash flow positive. Also, all casinos reopened in June 2020 after a temporary COVID-19 closure period of three months. Casinos are operating with reduced capacity for slot machines, table games and food & beverage seating. The management believes the company has ample liquidity to support regular business operations

Further, its shares have entered a bullish zone after price crosses the crucial long-term support level of 200-day SMA, and the stock strongly outperformed the benchmark index over the past 1-Month. On the valuation front, the stock is available at a forward P/E multiple of 10.3x, while industry (hotels & entertainment services) median stood at 19.3x.

However, the next wave of COVID-19 outbreak could strongly have a weigh on the group's financial performances. 

Therefore, based on the above rationale, we have given a "Speculative Buy" recommendation at the closing price of CAD 5.68 on November 16, 2020.

One year daily technical chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

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