Calian Group Ltd T.CGY

RBC Report

[retiredcf]

Their upside scenario target is $85.00. GLTA

August 8, 2024

Calian Group Ltd.
Short-term budgetary headwinds restrain growth

Outperform

TSX: CGY; CAD 49.97

Price Target CAD 65.00 ↓ 75.00

Our view: Q3 was below expectations and Calian sees FY24 at the low- end of guidance, due to short-term budget constraints at the Canadian Armed Forces. While a headwind to near-term growth, long-term visibility remains high, as shown by backlog and RPO coverage. Moreover, Calian appears likely to deploy additional capital on acquisitions in CY24, which is not reflected in estimates. Maintain Outperform, target moves from $75.00 to $65.00.

Key points:

• Q3 below RBC/consensus. Q3 revenue was $185MM (11% Y/Y, 0% organic), below consensus at $196MM (RBC at $193MM). The miss stems from lower than expected organic growth (0%, down from 3% Q2 and below RBC at 1%) and reduced contribution from the Decisive acquisition (est. $4.6MM revenue Q3, below RBC at $11.5MM). On lower revenue, adj. EBITDA was $18MM (+22% Y/Y), short of RBC/consensus at $21MM. Adj. EPS was $0.88 (+23% Y/Y), missing consensus at $1.07 (RBC at $1.09).

• Short-term budget constraints. Calian saw reduced demand at the Canadian Armed Forces due to procurement delays, increased contracting scrutiny and reduced volumes. The headwind was greatest in Learning (-14% Y/Y vs. -2% Q2, RBC at -2%), and to a lesser extent ITCS (-3% vs. RBC at 1%). Organic growth at AT was effectively in line (-2% vs. RBC at -3%), while Health was better than anticipated (14% vs. RBC at 6%). Calian sees FY24 at the low-end of guidance ($750-810MM revenue, $86-92MM adj. EBITDA). Following Q3, our FY24 estimates move to $755MM revenue and $86MM adj. EBITDA, down from $781MM and $90MM previously.

• Backlog and RPO coverage improve with Mabway. Total backlog rose to $1.196B Q3 from $1.089B Q2, primarily due to the addition of $140MM backlog from Mabway. Excluding Mabway, bookings were $177MM (0.90x book-to-bill), up from $162MM (0.86x book-to-bill Q2). TTM book- to-bill excluding Mabway improved to 0.91x from 0.86x Q2. Including Mabway, RPO coverage for the next 24 months equates to 34% of our revenue estimates, an improvement from 31% a year ago.

• Additional acquisitions are a potential catalyst. Calian believes additional acquisitions are possible this year, as it has a healthy pipeline and the financial resources (forecast $74MM FCF FY25e, 0.5x net debt / NTM EBITDA Q3 well below 2.5x leverage target). Over the last 3 years, Calian has deployed $190MM capital on acquisitions at an average multiple of 5.5x EBITDA. Assuming capital deployed on acquisitions at 6-8x EBITDA going forward, we estimate every $50MM capital deployed on acquisitions would add $0.26-$0.38 annual adj. EPS (6-8% accretion).

• Reducing target from $75.00 to $65.00. Calian has a long-term track record of compounding capital through acquisitions. The stock is trading at 6.9x NTM EV/EBITDA, below peers (10x) and Calian's 3-year historical average (9.2x). Our revised $65.00 price target reflects our updated estimates and equates to 8.3x CY25e EV/EBITDA, down from 9.1x previously, given reduced visibility to short-term organic growth.

[colourama]

This is getting rather cheap - added below $45 today. Patience will be rewarded here.

[retiredcf]

Right now the problem is lack of investor interest. Total volume so far today is 346 shares. This is why the SP is below where it should be because there is nothing going on other than one or two sells. GLTA