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CAE gets upgrade from RBC

Nov. 14, 2013, Montreal - CAE Inc. was upgraded to outperform from sector perform by RBC Capital Markets because of its attractive valuation and anticipated margin improvement.


November 14, 2013
By The Financial Post

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Analyst Steve Arthur noted the flight simulation equipment and pilot
training company has had a difficult year operationally. It spent
several quarters restructuring and streamlining operations, including
the relocation of approximately 20 simulators from areas with
overcapacity to regions with stronger demand.

“We believe that much of that work is now complete, and we should see
these redeployed simulators begin contributing materially to revenue
and margins in the second half of fiscal 2014,” Mr. Arthur said in a
research note.

Montreal-based CAE hiked its quarterly dividend by 20% to 6¢ on
Wednesday after reporting second-quarter revenue of $487-million, which
was below analysts’ estimates of $534-million.

Mr. Arthur noted the miss was largely due to a 6% year-over-year
decline in civil revenues, which came as little surprise given the
ongoing integration and simulator redeployments.

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Adjusted earnings per share of 15¢ was in line with analysts’ forecasts.

The analyst noted recent operational issues have caused CAE to lag
its peers and the stock now trades at a material discount to the
aerospace and defense group.

“We expect that CAE shares will react positively to growing evidence
of operating margin improvement, and suggest that investors build
positions ahead of that,” Mr. Arthur said, raising his target price on
the stock to $14 from $13.

“We knew the first half of fiscal 2014 would be challenged, and so
the weaker results have not impacted our outlook for CAE,” said Kevin
Chiang, analyst at CIBC World Markets.

He also noted the company’s margins are starting to improve
sequentially as it moves past restructuring, while its balance sheet is
now stronger with net debt to capital below 40%.

Mr. Chiang sees the dividend hike as a sign of CAE’s confidence in its forward outlook.

“In addition, as CAE’s free cash flow profile improves, the company
has indicated that returning cash to shareholders is a key priority,”
the analyst told clients, raising his target price to $13 from $12.50
and maintaining a sector performer rating.


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