Take a pass on Calian Group, Echelon Wealth says

New contract announcements sent shares of Calian Group (Calian Group Stock Quote, Chart, News: TSX:CGY) north on Monday, but Echelon Wealth Partners analyst Ralph Garcea says they aren’t enough to move the needle for him.

Last Friday, Calian Group announced it had renewed a contract to provide health support services to the Canadian Armed Forces that it has won since 2004. The contract has an initial term of four years with an option to extend for an additional eight.

“This is a significant win for Calian Health that reaffirms our commitment to quality in the health support services we have delivered to CAF for the past 12 years,” said Calian’s VP of health services Scott Murray. “We are thrilled to have the opportunity to continue to provide our superior-rated health services in support of the serving men and women of the Canadian Armed Forces, as well as their comrades in the RCMP and at VAC.”

Garcea says his concern is that these contracts are in the lower margin side of Calian’s business, and we won’t know how profitable they are until the second-half of fiscal 2018.

“The contract renewal does not provide enough incremental revenues to move the needle,” the analyst says. “In addition, two new health support contracts were announced — one with the RCMP initially valued at $19M over four years with the option of extending an additional eight years valued at $41M, and one with Veterans Affairs Canada (VAC) initially valued at $17M over four years with the option of extending an additional eight years valued at $38M. We view these incremental contract announcements as positive and would happily be more constructive if the Company continues to deliver incremental growth — but not at the expense of margins (which is not clear yet).”

In a research update to clients today, Garcea maintained his “Hold” rating and one-year price target of $30.00 on Calian Group, implying a return of negative eight per cent at the time of publication.

Garcea thinks Calian Group will generate EBITDA of $22.0-million on revenue of $273-million in fiscal 2017. He expects the company will generate the same $22.0-million in EBITDA on a topline of $280-million the following year.