CAE Inc.

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.

Q1FY21 Financial Highlights: CAE announced its quarterly results, wherein the company posted revenue of CAD 550.5 million as compared to CAD 825.6 million in the previous corresponding period (pcp). The decline in the top-line was primarily driven by sectoral softness in the aviation industry due to temporary closure of operations and travel ban. The company also faced headwinds from significantly reduced operations within the global training networks. The lower-income, coupled with fixed operating costs, resulted in an operating loss of CAD 110.3 million as compared to an operating income of CAD 110.9 million in pcp. Research & development expenses and SG&A costs stood lower than the previous corresponding quarter, while the profitability was impacted due to the inclusion of impairment and other losses amounting to CAD 96.6 million. The company reported a net loss of CAD 110 million as compared to a net profit of CAD 63 million in pcp. The company ended the quarter with cash and cash equivalent of CAD 363.3 million, while total assets stood at CAD 7,609.5 million.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: Continuation of the travel ban to eradicate the spread of COVID 19, the aviation sector might face challenges by operations halt and rising operating costs. Further, the Civil training segment might witness lower training income due to lower customer demand and government restrictions including travel bans, border restrictions, lockdown protocols etc.

Valuation Methodology: Price to Cash Flow (Illustrative)

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

Stock Recommendation: The stock of CAE slide ~50% and ~42% in the last six months and one year respectively. The clients of CAE are from the aviation industry and facing severe hindrance due to sharply lower demand, operational disruptions and restrictions on travel. The company is focusing on annual recurring cost savings of CAD 50 million starting in the fiscal year 2022 through the introduction and acceleration of new digitally enhanced processes and the optimization of the company’s global asset base and footprint. The company has ample liquidity with ~CAD 2.1 billion of cash and cash equivalents, undrawn amounts on our revolving credit facility and the balance available under our receivable purchase program. The current liquidity position seems sufficient enough to meet the near-term requirement. The ongoing COVID 19 restriction took a toll on the group’s businesses, especially in the Civil Aviation Training Solutions segment. We believe, the demand for training programs related to pilot, and aircrew is likely to be muted in the near term. We believe the sectoral weakness is likely to continue in the coming quarters with the ongoing travel ban restrictions, and we remain skeptical due to the lack of growth drivers. We have valued the stock using the Price to CF based relative valuation approach and arrived at a target price, which suggests a lower double-digit downside potential (in % terms). For the said purpose, we have considered industry (Industrials) median on NTM basis. Hence, considering the aforesaid facts, we recommend a ‘watch’ stance on the stock at the closing market price of CAD 19.95 on August 20, 2020.

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

Chorus Aviation Inc

Chorus Aviation Inc (TSX: CHR) is a travel & leisure group based out of Canada. The company offers a variety of regional aviation solutions and support services. The company operates an airline with aviation interests including Jazz Aviation LP (Jazz), Voyageur and Chorus Aviation Capital. It specializes in contract flying, maintenance, repair and overhaul and aircraft leasing solutions. The Group business is divided into two reportable segments: Regional Aircraft Leasing and Regional Aviation Services

Q2FY20 Financial Highlights: CHR announced its quarterly results, wherein the company posted operating revenue of CAD 184.214 million, reflecting a dip of 44.6% on y-o-y basis. The decline was attributable to a decrease in third-party maintenance, repair and overhaul activity, lower aircraft part sales, and lower contract flying in Voyageur due to the economic impact of COVID-19 pandemic. Operating income stood significantly lower at CAD 33.683 million as compared to CAD 50.361 million in the previous corresponding period (pcp). The decline was primarily attributable to lower revenue, partially offset by a lower operating expense. Net interest expense stood higher during the quarter, as compared to the previous corresponding quarter. Adjusted EBITDA stood at CAD 91.042 million, reflecting a rise from CAD 85.720 million, primarily generated by the growth in aircraft leasing. The company reported net income of CAD 29.165 million, down from CAD 38.941 million in pcp, due to change in net unrealized foreign exchange on long-term debt, net repossession costs net of the Flybe security package recovered, and increased employee separation program costs, partially offset by income tax recovery.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: Substantially all Chorus’ revenue is derived from airline customers, through its CPA and its leasing of aircraft to airline customers globally; therefore, Chorus is exposed to the challenges facing the air passenger industry.

Stock Recommendation: The stock of CHR corrected drastically in the recent past due to suspension of operations across the aviation segment. The stock fell ~68% so far this year.  On a year to date basis, the company witnessed a decrease in third-party MRO activity, lower aircraft part sales, and decline contract flying in Jazz and Voyageur coupled with a lower capitalization of major maintenance overhauls on owned aircraft under CPA agreement. The COVID-19 pandemic and resulting government restrictions have created unprecedented challenges for the aviation industry, and global cancellations are impacting airlines. As of June 30, 2020, Chorus Aviation Capital’s lease deferral receivable was CAD 38.4 million. These deferrals are estimated to increase Chorus’ trade receivables to approximately CAD 60.0 million by the end of the year. However, to combat the current economic cycle, the company took prudent action and reduced its workforce by ~65% in order to lower the input costs. Furthermore, the company’s operation took a hit, and Chorus delayed the delivery of six of the nine planned CRJ900. Considering the bleak outlook of the aviation sector, we prefer to remain on the sideline. On the valuation front, the stock is trading at forward EV/Sales multiple of 2.0x against the industry (Passenger Transportation Services) average of 1.5x. Hence, considering the aforementioned facts, we recommend ‘Watch’ stance on the stock at the current closing price of CAD 2.56 on August 20, 2020.

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

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