Desjardins : Meeting with managementMarketing recap—management is being proactive, no sitting on hands here.
The Desjardins Takeaway
On September 11, we hosted investor meetings with CGY management in Montral. In attendance were CEO Kevin Ford, CFO and Development Officer Patrick Houston, and Director, Investor Relations Jennifer McCaughey. We were encouraged by management’s dissatisfaction with CGY’s recent share price performance and comments that the Canadian Armed Forces budget cuts have not worsened or affected other parts of the business (including CGY’s ability to continue making acquisitions given its strong balance sheet)
Highlights
Update on the Canadian Armed Forces budget cuts—not CGY’sfirst rodeo. The Liberal government’s recent cuts of nearly C$1b at the Department of National Defence were topical during the meetings, but management was confident that the exercise would be short-lived (despite the 202627 timeline presented). This is not CGY’s first rodeo—in 2014, the Conservative government clawed back ~C$3b in defence spending, reducing the budget to just 1% of GDP, the lowest level in Canadian history. Management anticipates an uptick in training over the next 12 months as the cuts work their way through the department, scheduled procurement resumes and the combat-readiness of the armed forces continues to deteriorate (link in French) (~14,000 troops short currently). Looking ahead, as we indicated in a recent note, we expect Canadian defence spending to trend upwards over the medium to long term (directionally positive) as geopolitical risks rise—and especially if Donald Trump is elected in November given his threats to not defend allies that fail to hit the 2% NATO benchmark. Notably, defence spending on health-related services was not included in the cuts.
Key takeaway—performance blip in defence has not had an impact on CGY’s ability to close more deals. CGY ended 3Q with net debt to adjusted EBITDA of 0.6x, far below its maximum target of 2.5x. Given CGY’s strong balance sheet, management was clear during the meetings that it has no concerns about simultaneously deploying capital toward its newly renewed NCIB and on potential acquisitions (pipeline is full of opportunities).
Valuation
Maintaining our C$82 target. Our target is derived from an average of three methods: (1) a 16.0x multiple on our FY25 adjusted EPS estimate; (2) a 10.0x EV/EBITDA multiple on our FY25 EBITDA estimate; and (3) a DCF value of C$91.68.
Recommendation
We reiterate our bullish stance
Management understands the Street’s concerns—not sitting on its hands.
We were encouraged by management’s clear dissatisfaction with CGY’s recent share price performance, and it is assessing several different options—including but not limited to improving disclosures, being more aggressive on the NCIB vs historical periods and refining its annual guidance. Management also demonstrated its understanding of the complexity of the CGY business and its core four segments (or four-piston engine), with future efforts likely to be focused on the company’s history of being a successful acquiring compounder (as presented at the investor day) and metrics such as operating free cash flow to simplify the story for new investors—we estimate that CGY is currently trading at an operating free cash flow yield of 11% (based on our FY25 estimates), which we would qualify as extremely attractive, especially when considering its clean balance sheet. Management also stated that it is making efforts to try and expand the investor base in both Europe and the US—this should lead to improved daily liquidity, which has been one of the biggest pushbacks on the name. Looking forward, CGY aims to scale its proven growth model and believes it can convert ~70% of EBITDA to operating free cash flow—if it is successful in achieving the C$125m annual EBITDA target, this would translate into ~C$88m operating free cash flow that the company can use to fund acquisitions or buy back shares, which is quite attractive in our view (as the business scales, it should become more interesting to new investors).