Acquisitions Lead The Way Our Conclusion
Calian’s second quarter beat was driven by larger-than-expected contribution
from acquisitions. Pull-forward revenue at Decisive Group and continued
strength at HPT were important contributors and more than offset weaker-
than-normal organic growth. Consolidated organic growth of 3% was below
expectations with three of four segments showing negative organic growth.
Full-year organic growth is still expected to be in the 6% range. Execution on
the M&A agenda has been faster than expected, and below-target
acquisition multiples are a nice positive. Given its diverse mix and healthy
balance sheet, Calian has runway for its acquisition plans, and accretive
M&A remains the most compelling reason to own the shares. We retain our
Outperformer and $76 price target as our F2025 model is largely unchanged.
Key Points
Unpacking F2024 Guidance: Updated 2024 guidance reflects partial year
contributions from Mabway ($35MM annual) and MDA Nuclear ($8M annual).
Assuming regular seasonality in the acquired businesses, the midpoint of
updated guidance reflects organic growth of ~6%, generally in line with what
the previous guide had implied. Prior to Q2 we had been forecasting 8.7%, and
our updated 2024E forecast includes 6.2% organic growth, with most of the
change due to 3% growth in Q2. Our organic growth forecast puts us slightly
above the midpoint of the revenue guide. Adj. EBITDA margin at the midpoint
of guidance is 11.4%, and with margin of 11.9% in H1, the guide implies 10.9%
H2 margin. The pulling forward of Decisive revenue into Q2 drove some of the
Q2 margin strength as well as elevated margins in the AT segment.
Normalization of ITCS and AT margins, and investments to grow Health, will
likely drive the ~100 bps contraction in margin in the second half of the year.
Playing The Long Game: When asked about the impact of accelerating
defense spending, management noted that despite increased commitments
from Canada and NATO allies, there is a notable lag – potentially years long
– between the commitments and the signed contracts that would positively
impact Calian’s backlog and revenue. We expect little change in the short-
term military spending environment, but see Calian as well prepared to
benefit from the increases, particularly in the Learning segment where the
Mabway acquisition gives Calian a better opportunity to capture European
demand.
Active On M&A: Calian has followed through on its intention to be more
active on its M&A agenda, already deploying $90MM of its $250MM-$350MM
total spending target by 2026. Calian’s last three deals have been in each of
the ITCS, Advanced Tech, and Learning segments and we would not be
surprised to see the next acquisition land in the Health business. Acquisitions
won’t always rotate between segments, but with Calian’s stated desire to
broaden its digital health offerings, it does seem like a real possibility. The
three M&A deals in F2024 have come at attractive multiples (4.9x EBITDA
combined) and with balance sheet flexibility (PF leverage of 0.8x vs. target of
2.5x) Calian looks to be on track to meet or exceed its spending targets.