How will increased defense spending affect Calian Group?

Ventum Capital Markets analyst Rob Goff maintained his “Buy” rating and $60 target on Calian Group (Calian Group Stock Quote, Chart, News, Analysts, Financials TSXV:CGY), calling Ottawa’s accelerated plan to hit NATO’s 2% defence spending target a major near-term catalyst for the company.

In a June 9 note, Goff said the $9.3-billion boost in military funding for fiscal 2025–2026, five years ahead of schedule, positions Calian to benefit meaningfully given its strong exposure to defence, space, and health services.

On June 9, Prime Minister Mark Carney announced that Canada would meet NATO’s defence spending target in fiscal 2025–2026. The move signals a sharp increase in near-term military spending and outsourcing for equipment and infrastructure. Canada has not met the 2% target since it was set in 2014. The announcement follows the recent introduction of the Strong Borders Act and commitments made in late 2024 to boost border security and immigration enforcement.

Goff said the impact of this is positive for Calian stock.

“We view these commitments as a meaningful tailwind for Calian given its scale as a unique defence contractor and its diversified portfolio of service offerings in Canada,” Goff said. “This follows the Company’s Q2/F25 declaration of its realigned focus on core pillars through Defence, Space, and Health, all of which we view as highly relevant against the backdrop of an augmented military in Canada. Where defence spending represents ~49% of LTM revenues (or C$363M) as of the most recent Q2/F25, the leverage to increased expenditures is significant against just 11.7M shares outstanding. The bullish outlook supports our ‘Buy’ rating and $60.00 target.”

Goff said that while details are still unclear, the implied ~$62-billion run-rate compares to the $41-billion budget for 2024–2025, or about 1.3% of GDP.

“We remain cautious about the exact capacity and pace of the government to meet these objectives,” he said. “Nevertheless, we expect the large incremental spending to significantly benefit Calian and its close defence peers, pulling forward a massive catalyst originally expected to materialize over the coming half-decade.”

Goff said the announcement’s focus on higher military pay, increased spending with Canadian vendors, and expanded border patrol, both north and south, was particularly noteworthy.

“We would expect increased compensation to encourage greater military enrollment, where Calian benefits in providing training and healthcare services,” he said. “While the 2% commitment is an important near-term milestone, adoption of 3.5% across NATO would represent a powerful supplementary tailwind.”

Calian shares trade at 6.7x and 5.8x EV/EBITDA for 2025 and 2026, or 8.9x and 8.1x based on his $60 price target. Goff’s one-year DCF target of $69 per share uses a conservative 13.3% discount rate and an 8.25x terminal EV/EBITDA multiple, implying a 10% free cash flow yield and 3.4% perpetual growth rate.

Goff said this is a very attractive value.

“While we have decided to leave our estimates unchanged and await execution on the incremental defence spending over the coming months, we see the government’s 2% commitment along with NATO’s discussion of 3.5% as a subsequent target as clear catalysts for a value stock in search of momentum. We could see contract win announcements preceding revenue visibility.”

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