CAE | Optimistic forecasts come up against analyst questions

(Montreal) The favorable context in the defense and civil aviation sector gives CAE management confidence to achieve its 2025 targets. However, analysts would have liked to have more details from the pilots as to the steps required to arrive at their destination.

Analysts asked several questions about how the Montreal-based company plans to hit its 2025 targets during a conference call on Wednesday to discuss fourth-quarter results.

CAE aims to grow its earnings per share at a rate of 25% over three years (from fiscal year 2022 to 2025). The management reiterated this objective which would require an improvement in the profitability of the defense sector in the coming quarters.

The defense sector is entering a bullish cycle as geopolitical tensions rise, the company believes. Its president and CEO, Marc Parent, also pointed out that the division’s order-to-sales ratio is 1.10, which can be interpreted as an indicator of future growth. “There is no doubt that we are going to have strong growth in the defense sector in the next year”, assures the leader.

He also explained that the weight of “a very small number of less profitable contracts” should decrease in the next 12 months. “There are programs, which we signed on a few years ago, that have low margins. It will dissipate within the next 12 months, but I can’t be more specific on the exact timing. »

Mr. Parent’s responses did not answer questions from an analyst who participated in the conference call. “I understand why you can’t give all the details,” concedes the analyst. At the same time, this resistance to giving us more detailed information leaves us all confused, in my opinion, about what is happening and when things will be better. »

CAE cannot provide all the details requested by analysts due to the secrecy surrounding defense contracts, Parent said in an interview after the call. “When we’re asked how much capital we’re going to deploy on certain defense contracts, yes that’s part of the trade secrets. We cannot be transparent in that sense at the moment. »

The lack of clarification weighed on CAE’s action. The stock was down $2.15, or 7.19%, at $27.76 at the close of trading on the Toronto Stock Exchange.

Earlier in the day, analyst Tim James of TD Securities saw the confirmation of the 2025 targets rather favourably. “It should allow investors to focus on the strong favorable currents, cyclical and structural. »

The past year has been difficult for the defense division due to supply chain disruptions and labor shortages. Defense segment margins were 5.7% in the fourth quarter, compared to 7.8% in the same period last year.

Last summer, CAE recorded a charge of $28.9 million related to two separate military programs in the United States. Quarterly results showed that these headwinds have since subsided and the improvement continues, CAE said.

Despite questioning the forecast, CAE reported slightly better-than-expected results in the fourth quarter of its fiscal 2023 ended March 31.

The company reported net profit of 98.4 million in the fourth quarter, up 79% from 55.1 million in the same period last year. Adjusted diluted earnings per share is 35 cents. Revenues, for their part, increased by 32% to 1.26 billion.

Prior to the earnings release, analysts had expected earnings per share of 34 cents and revenue of $1.2 billion, according to data firm Refinitiv.

RBC Capital Markets analyst James McGarragle views the results favorably and says he’s “impressed” with the strength of the civil division. “The defense sector is showing strong revenue and backlog growth, but our focus remains on management’s ability to improve margins. »