Calian Group Ltd T.CGY

RBC

[retiredcf]

Current and upside scenario targets are $72.00 and $87.00. GLTA

March 28, 2024

Calian Group Ltd.
On the road with management

Our view: We hosted Calian’s management for a day of investor meetings yesterday. Management expressed confidence in achieving the growth targets in its 3-year strategic plan through organic growth and deploying capital on acquisitions. As a capital allocator, Calian is deploying capital at >15% IRR into 4 distinct, mission critical markets. Post-acquisition organic growth and margin expansion validate the value creation from acquisitions. Maintain Outperform.

Key points:

• Confidence in 3-year strategic plan. Calian's 3-year strategic plan calls for 15% revenue CAGR and 24% adj. EBITDA CAGR from FY23 to FY26. Management appeared confident in achieving these targets, given: 1) likely sustained organic growth momentum; and 2) deploying capital on acquisitions at >15% IRR. At FY23 FCF conversion, Calian's strategic plan implies FCF/sh nearly doubles from $4.11 FY23 to $7.66 FY26e. Moreover, leverage is likely to remain below Calian's max target of 2.5x.

• Multiple organic growth tailwinds. Organic growth reached a 2.5 year high last quarter (12%). While organic growth is likely to be sustained at lower levels than last quarter, we see healthy growth going forward as Calian’s segments are benefiting from long-term structural tailwinds. Examples include the growing need for organizations to address cybersecurity, the resurgence in new space investments, the drive for higher military readiness amidst labour shortages, and adoption of new virtualization technologies (e.g. virtual reality, telehealth).

• 4-piston capital allocator. Due to Calian’s 4 distinct business units, the company is able to shift capital allocation between units depending on available opportunities, prevailing market conditions, and internal capacity. Calian's sweetspot is targets between $30-80MM, avoiding competition from private equity buyers and allowing the company to deploy capital at >15% IRR prior to synergies and leverage. Future M&A opportunities include building out its Learning business in Europe, expanding ITCS' footprint into new regions, new product offerings in Advanced Tech, and additional pharma solutions in Health.

• Post-acquisition success validates value creation. Based on Calian's last 11 acquisitions, acquired businesses have experienced on average 31% revenue growth and 53% EBITDA growth in the two years following acquisition. Calian deploys capital in mission critical markets where the target is able to better address new opportunities using Calian's capital and scale. Moreover, Calian is making new sales investments to better address cross-sales between its business units, which is a potential enabler of stronger long-term organic growth.

• Maintain Outperform. Our Outperform thesis on Calian reflects: 1) continued compounding of capital through acquisitions and organic growth; 2) valuation at 8.0x NTM EV/EBITDA is below peers; and 3) high consistency and low beta (0.67) due to Calian’s four business units. Our $72.00 target is unchanged and remains based on 8.6x CY25e EV/EBITDA.