Calian Group has lots more upside, says Echelon Capital

Ottawa-based Calian Group (Calian Group Stock Quote, Chart, News, Analysts TSX:CGY) is starting the year off right with a new accretive tuck-in, according to Amr Ezzat, analyst for Echelon Capital Markets. Ezzat gave an update to clients on Monday where he reasserted his “Buy” rating while upping his target from $75.00 to $77.00.

Calian is a business and technology services provider for industry and government clients in Canada and globally, through four segments: Advanced Technologies, Health, Learning and Information and Technology.

The company announced on Monday the acquisition of Vaudreuil, Quebec-based antenna systems company InterTronic Solutions in a definitive agreement for up to $22 million. The deal involves $13.0 million paid on closing and performance-based earnouts over the next 24 months for up to $9.0 million.

Calian said bringing in InterTronic will give its aerospace, defence and satellite customers a broad range of capabilities for their Radio Frequency ground system needs.

“The InterTronic product portfolio is a natural extension of Calian’s existing satellite gateway, modulator and monitoring portfolio and will further diversity Calian’s customer base,” said Patrick Thera, President of Advanced Technologies for Calian, in a press release. “The exceptional pointing, precision and reflector surface accuracy make InterTronic antennas ideal for applications such as advanced very long baseline interferometry or VLBI.”

Calian President and CEO Kevin Ford said in the press release, “This acquisition supports our four-pillar growth framework, specifically, customer diversification with strong US based customers and Innovation with technology that strengthens our ground systems offerings.”

On the deal, Ezzat said InterTronic adds to Calian’s North American deployment capacity and boosts its client roster in the US defence and space exploration markets, adding clients like NASA and John Hopkins Applied Physics Laboratory, while from InterTronic’s point of view, being acquired by the larger Calian will allow it to bid on larger opportunities, including in Europe through Calian’s relationship with the European Space Agency and SatService.

“While relatively small, we believe the acquisition to be highly accretive and adds breadth to CGY’s ground satellite system product line and its customers. Namely, we estimate InterTronic boosts run-rate EBITDA by about five per cent. We are encouraged and remain fans of management’s sensible and accretive capital deployment strategy,” Ezzat wrote.

“We recently argued that the Street has consistently underestimated Calian’s valuation by failing to recognize the accretion potential of M&A on the Company’s earnings and more importantly on its valuation. We believe using an EBITDA/earnings multiple on short-term earnings estimates significantly (and incorrectly) undervalues Calian’s shares as it gives no recognition to the Company’s inorganic growth activity (and indeed, its underleveraged balance sheet),” Ezzat said.

Ezzat has bumped up his forecasts to reflect the acquisition and is now calling for fiscal 2021 (year end September 30) revenue and EBITDA of $469.4 million and $43.2 million, respectively, and fiscal 2022 revenue and EBITDA of $496.7 million and $53.6 million, respectively. At press time, Ezzat’s $77.00 target represented a projected 12-month return of 18.9 per cent.

Ezzat called Calian a quality diversified operation with a deep bench, an underleveraged balance sheet, and a solid track record of value creation through acquisition and innovation.

“CGY has all the bells and whistles an investor would seek out in a quality company. The stock has tripled in the last three years, as management transitioned its philosophy and growth strategy from what was a ‘steady Eddie’ operator with stable revenues/earnings, to one seeking to capitalize on growth in a more aggressive fashion,” Ezzat said.

Calian had a great year in 2020 where its share price rose 72 per cent. The company last reported earnings in late November when its fiscal fourth quarter was its ninth consecutive with record revenue, an increase of 35 per cent year-over-year to $123 million and up 16.6 per cent sequentially. Adjusted EBITDA grew by 14 per cent. year-over-year to $9.2 million. For the fiscal year, Calian’s revenue came in at $432 million, up 26 per cent year-over-year, while EBITDA grew by 36 per cent to $36.8 million.

For the fiscal 2021, management guided for revenue between $450 and $490 million and adjusted EBITDA between $38.5 million and $42 million. In his comments, Kevin Ford noted that organic growth was strong for the fiscal 2020 at 21 per cent, led by the company’s Health and Advanced Technologies segments. Over the fiscal fourth quarter, Calian signed $111-million in new contracts and the company finished the Q4 with $24.2 million in cash and no debt, down from $46.3 million in cash and no debt at the end of the previous quarter.

“We completed four acquisitions in 2020, three of them in new market verticals in which Calian did not previously participate. M&A has played an important role in all four of our segments by bringing in new customers and new technologies aligned to our growth strategy,” Ford said in a press release.