CAE – You need to look passed the numbers now

CAE is a leading global training company in the civil aviation, defense and security, and healthcare markets. CAE is the training partner of choice for aviation professionals, business aviation operators, and aircraft manufacturers over the world.

The company has the largest civil aviation training network in the world and is the leader in aviation personnel recruitment with 170+ aircraft, 300+ full flight simulators and more than 60 training locations.

It has made flying safer, maintained defense force readiness, and enhanced patient safety in its seven decades of experience. The company’s defense business has a global presence in over 40 countries and more than 70 platforms.

The company’s healthcare business caters to customers in more than 80 countries worldwide. By geography, the USA accounts for 43% of revenues, followed by Europe and the UK (23%) and the rest of the world (~43%).

CAE offers a comprehensive portfolio of training services, and simulation products for the air, land, naval, and public safety markets. It operates through Civil Aviation training solutions (~60% of revenues), Defence and security (~37%), and healthcare segments (~3%).

CAE is also available as a dual listed stock trading under CAE on the NYSE.

Key Investment Data

 
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Revenue Growth & Market Exposure

CAE trains more than 135,000 pilots every year. The company operates in highly regulated industries with compulsory training requirements. This results in recurring business and sticky customer relationships. CAE generally enters into long-term agreements with business aviation customers worldwide such as AirAsia, Jazz Aviation, Flexjet, etc.

A large network of global training centers, unique training solutions, and a wide product offering are CAE’s key competitive strengths. The civil aviation segment should benefit from secular growth trends in commercial and business aviation.

The company currently commands a 30% share of the civil aviation training market which is a $6.2 billion market and a 70% market share in simulators worldwide. Simulation products now account for nearly 40% of CAE’s total revenues and training and services account for the remaining ~60%. There is a growing demand for new civil and business jet pilots, and captain upgrades.

Its defense and security business is present in key growth markets and should benefit from increased government spending in this sector. CAE’s defense business has a huge headroom to grow in the $14 billion military training and simulation market. Defense organizations worldwide trust CAE for its innovative and comprehensive training solutions. 

The pandemic caused significant disruptions in the company’s businesses. The company, however, rebounded to quarterly profitability and positive free cash flow. It also launched new digitally-enabled services, software solutions and innovative business processes, and lowered its cost base during the quarter.

The prospective acquisition of L3Harris’ Military Training business will significantly accelerate its Defence growth strategy and broaden its position in other large military training and simulation domains. CAE stands a good chance to gain from growing trends like e-learning, remote work, the imperative on safety, and the digital transformation and virtualization of the physical world.

As a leading provider of a broad range of training solutions in healthcare, CAE’s healthcare segment should also benefit from the increasing use of simulation, quality care, and patient safety in the post-Covid world.

Dividends

CAE has grown its EPS at more than 9% CAGR in the last five years. The company has, however, suspended its share repurchase and dividends currently.

The company enjoys the reputation of a trusted partner for regulatory organizations and the industry associations like IATA, Federal Aviation, EASA, etc. The company constantly engages in the development of advanced training solutions for its partners. A strong client list grants visibility of cash flows. CAE’s increased focus on services also increases its share of recurring revenues.

The company has been looking at increasing its revenues from services, which now account for nearly 60% of total revenues as compared to just 15% in 2001. CAE is also growing through acquisitions. Its strategic acquisition of L3 Harris military training business is expected to generate EPS accretion in the low-teens % range in the first full year post closure. It is also estimating ~$35-45 million of run-rate cost synergies, to be realized by the end of the second year of closure which is expected to be in the second half of CY 2021. 

It has deployed over $510 million organic capital in Civil over the last five years that has increased its recurring revenue deployed in Civil over the last five years has increased the base of recurring revenues and has been highly accretive and has been highly accretive. Its training operations are highly cash-generative and the company can continue to be cash flow positive, even at low levels of utilization.

Unique comprehensive solutions, unmatched global reach, scale, and deep customer relationships form a deep moat around CAE’s business. A large backlog of contracts with government customers essential to national security is an added advantage for the company.

Competition

The commercial airline training industry is quite competitive. CAE’s major competitors are aircraft manufacturers and companies having deep industry relationships.

Many aerospace and defense companies are capturing market share by consolidating existing commercial aircraft simulation companies and developing their own internal capabilities. Rockwell Collins, Lockheed Martin, Boeing, Raytheon, etc. are top competitors. Many new participants have also emerged in recent years.

As a pure-play training company, CAE differentiates itself from the competition with its innovative training solutions such as the next-generation pilot training solution CAE Rise and proven leadership in training equipment and services.

Bottom Line

CAE is expecting strong growth in FY 2022 and stands a good chance to leverage its leadership in three attractive markets, civil, defense, and healthcare, with secular tailwinds in a post-COVID-19 world. Training center utilization has been gradually increasing, as things get back to normal and flight crews resume their training activities.

The company is investing in strengthening its offering and expanding its addressable market with highly innovative software solutions and is well-positioned to leverage technology and drive enhanced customer experiences going forward. Its upcoming acquisition transaction is expected to generate significant opportunities to create value for both customers and shareholders.

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