Challenges could provide a buy opportunity…

CAE is a leading global training company in the civil aviation, defense and security, and healthcare markets.

With seven decades’ long experience, CAE has made flying safer, maintained defense force readiness, and enhanced patient safety with its training and expanded product offering. The company has a global presence with 160 sites and training locations in over 35 countries. By geography, the USA accounts for 42% of revenues, followed by Europe (17%) and the rest of the world including Asia (~40%).

CAE offers a comprehensive portfolio of training service, 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 (~36%), and healthcare segments (~4%).

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.

Investment Data

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Revenue Growth & Market Exposure

CAE has trained more than 220,000 civil and defense crewmembers, including more than 135,000 pilots, and thousands of healthcare professionals worldwide. 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. CAE currently commands a 38% share of the civil training market and 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.

CAE’s 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 $22 billion training systems integration market. Defense organizations worldwide trust CAE for its innovative and comprehensive training solutions.

Q1 was marked by lower demand and major disruptions to CAE’s global operations as a result of government restrictions including travel bans, border restrictions, lockdown, etc. The company’s revenues declined by 33% in the first quarter of FY 2021 and free cash flow was negative $92.7 million. Specific items during the quarter included costs incurred in relation to the COVID-19 pandemic including a write-off of more than $100 million as amounts owed from customers. CAE had to temporarily suspend manufacturing at its main facility. The pandemic has also caused significant disruptions in defense and healthcare. However, Defence booked orders for $201.3 million, including contracts from the U.S. Air Force and Navy during the quarter.

The pandemic also enabled CAE to utilize its technical capabilities and new opportunities globally in the design, manufacture, and sale of ventilators. The company continues to address its customers’ critical needs through virtual reality and distance learning. 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 shown an impressive dividend growth of 24% CAGR over the last decade. The company has, however, suspended its share repurchase and dividends currently.

CAE Inc. 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. Moreover, 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 accounts for nearly 60% of total revenues as compared to just 15% in 2001. CAE is also growing through acquisitions and has completed 12 acquisitions in the last two years, including Bombardier’s Business Aircraft Training (BAT) business, the largest in its history. BAT is fully integrated and has delivered higher than expected revenue and cost synergies.

The company has announced a ~$100 million restructuring program to yield $50 million in annual recurring savings starting in FY 2022. CAE expects free cash flow to turn positive in the second half of the year. Its training operations are highly cash-generative and 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 by 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

Though the pace of recovery is expected to be slow, CAE stands a good chance to leverage its leadership in three attractive markets with secular tailwinds in the long term – civil, defense, and healthcare. In the short-term, however, the pandemic will have a negative impact on its performance. Training center utilization has been gradually increasing to more than 40%, as CAE’s facilities reopen and flight crews resume their training activities. The company is well-positioned to leverage technology and drive enhanced customer experiences and greater operational efficiencies going forward.