-- RBC Capital Markets maintained its sector perform rating and C$42.00 price target on the shares of CAE (CAE.TO, CAE) on Friday.
RBC expects CAE's upcoming Fiscal Q4 report to shift attention to the company's long-term growth opportunities. It expects management to outline targets for revenue, margins, CapEx, EPS, and ROIC through FY30.
RBC believes secular tailwinds in both Civil and Defense can support 4-5% revenue growth longer-term, with key focus on what level of FCF management's targets imply.
RBC's new FY30 forecasts call for ~100% FCF conversion and EPS of $2.21, it added.
"While we remain Sector Perform into the quarter, we will be looking for colour that gives us increased confidence in execution, which could provide a lift to valuation," said RBC.
RBC believes FY27 will "come in well below street estimates," although RBC does not expect this to be a major focus for investors. It expects FY27 to represent a "transitional year" for CAE as it works through the execution phase of its transformation plan.
"While the strategic initiatives we expect management to lay out could yield meaningful benefits over the medium term, the near-term financial profile will likely reflect the friction of restructuring activities, ongoing market headwinds, and the lag between cost actions and margin realization," added RBC.
RBC expects management to lay out a growth framework underpinned by "strong secular tailwinds" in both Civil and Defense that it believes will support revenue growth of 4-5% annually.
"On the margin front, we expect management to target Civil operating margins of ~25% (vs. ~20% today), reflecting the benefits of network rationalization, improved utilization, and a leaner cost structure; and Defense operating margins of ~11% (vs. ~8.5% today), driven by the continued roll-off of legacy contracts and a higher mix of new, betterpriced programs," said RBC.
RBC expects these revenue and margin improvements to drive capital efficiency gains, with CapEx moderating to ~$300MM longer-term as network right-sizing reduces growth capital requirements. RBC expects this to drive EPS of >$2.00 in FY30.
"We now value CAE off our new F30 EPS estimate of $2.21, applying a 22.5x multiple and discounting back at 8%, which results in our $42 price target," said RBC.
Price: $34.50, Change: $-0.27, Percent Change: -0.78%