RBC: we like what’s happening at CAE

RBC Dominion Securities analyst James McGarragle says CAE’s (CAE Stock Quote, Chart, News, Analysts, Financials TSX:CAE) transformation plan is gaining traction after better-than-expected fiscal Q1 results.

As reported by the Globe and Mail, in an Aug. 17 update, McGarragle upgraded CAE to “Outperform” from “Sector Perform” and raised his target to $46.00 from $38.00. The average target is $42.33.

“We liked the transformation plan when it was initially disclosed — the issue for us was never the strategy, it was execution certainty and valuation,” McGarragle said.

CAE reported adjusted operating income of $157-million, ahead of consensus at $152-million and McGarragle’s $153-million estimate. Adjusted EPS was 26 cents, above the 23-cent forecast from both McGarragle and the Street.

McGarragle said all eight transformation workstreams are on track, with $133-million of the planned $200-million to $250-million of total costs already incurred.

The analyst said the most important data point was customer attrition from network rationalization tracking below 1% of Civil revenue, a better outcome than he had expected.

Civil utilization improved to 72.2% from 68.8%, while Civil order intake rose 64% year-over-year for a 1.31-times book-to-sales ratio. Wins included a 15-year WestJet agreement and a multi-year full-flight simulator contract with Turkish Airlines.

McGarragle said Civil margin weakness in the quarter should prove temporary, with two-thirds tied to the Middle East and the rest related to discrete transformation costs.

In Defense, he said CAE’s $10.7-billion backlog and more than $5-billion incremental pipeline support a multi-year growth runway. The pipeline includes OEM partnerships with Leonardo, Saab and TKMS.

McGarragle said early execution progress and an attractive valuation create a compelling entry point. He expects CAE to compound EPS at about 20% annually from fiscal 2027 to fiscal 2030.

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