An undervalued combination of growth and profitability with an M&A kicker
Investment Recommendation
In the wake of the initial COVID-imposed lockdowns in 2020, Calian demonstrated the resilience of its diversified business model as benefits to health units offset impacts elsewhere. In recent months, however, the focus has shifted toward the post-pandemic outlook which has led to a pullback in the stock (-12.2% YTD). Following an in-line Q4 print in later November, Calian provided its annual outlook for F2022, targeting 6 – 14% revenue growth with stable margins. In our view, this confirms Calian’s ability to maintain momentum as we transition to the next stage of the pandemic. Against these fundamentals, we believe the current valuation, at 11.3x F2022E EBITDA, is attractive and leaves upside as the company continues to deploy slack balance sheet capacity on M&A. Our $77 price target equates to ~13 - 14x on our EV/EBITDA estimates one year out, vs. peers trading at 11.8x. We rate Calian BUY.
Investment Highlights
• F2022 guidance confirms growth trajectory. Calian’s Q4/21 recent results were in line with expectations (view note here). More significantly, the company provided F2022 guidance calling for 6 – 14% top-line growth on stable EBITDA margins. Coming off a year in which Calian benefited from its large US customer ground station build and substantial COVID-driven health work, we believe sustained growth at these levels showcases the resilience of the company’s diversified operations and ability to backfill its pipeline.
• As Health cools off, other segments are expected to pace growth. With a significant portion of the company's large ground station contract in the rear-view mirror, Calian has managed to replenish its backlog with a higher volume of smaller projects that should sustain growth in the Advanced Technologies segment in F2022. The Learning segment, including contributions from the recent SimFront acquisition, is expected to rebound as a “massive” backlog of work has accumulated throughout COVID and opens new doors in end-to-end training. Meanwhile, its Dapasoft/ iSecurity acquisitions in the increasingly relevant healthcare/cybersecurity spaces has transformed IT and Cyber into a mid-to-high-teen EBITDA margin business.
• A strong balance sheet suggests high accretion for ongoing M&A. Calian holds ~$180M in liquidity, inclusive of an undrawn $120M credit facility with improved FCF expectations in F2022 as recent working capital investments unwind. Following the SimFront acquisition, management has reiterated its strategy of pursuing tuck-in M&A at reasonable multiples (4 – 8x EBITDA), particularly in the Advanced Technology
and IT and Cyber segments. In our view, continued M&A is a welcome catalyst to the stock as Calian has proven its ability to integrate and drive synergies from its recent deal flow. We do not build any unannounced M&A into our forecasts.
• Estimates summary: We raised our forecast with the Q4 results, reflecting management’s initial F2022 guidance. For F2022, we forecast revenue of $570M (Street $567.1M), $59.0M in EBITDA (Street $58.5M), and adj. EPS of $3.61 (Street $3.64). For F2023, we forecast revenue of $602.3M with EBITDA of $64M and adj. EPS of $3.83.
Valuation
Calian trades at 11.3x EV/NTM EBITDA on our estimates vs. peers at 11.8x. Our $77 target price is based on ~13 – 14x EV/EBITDA applied to our forward estimates, one year out (September 2023).