Calian Group Ltd T.CGY

RBC

[retiredcf]

Calian Group (TSX: CGY)
Outperform, C$65.00 price target

We expect Calian to report Q4/FY24 results in line with consensus and provide FY25 guidance that brackets consensus. Sentiment remains low, given the deceleration in organic growth Q3 due to reduced spending and procurement delays at the Canadian federal government. We assume that the challenging environment persists in the short term, which weighs on near- term organic growth. Despite the headwind to organic growth, we think the contribution from acquisitions is likely to drive sustained overall revenue and adj. EBITDA growth. Maintain Outperform rating, given Calian’s discounted valuation and track record of compounding capital.

Calian is reporting Q4 results on November 26. Calian will report Q4/FY24 results on November 26, after market close. The company will host a conference call on the morning of November 27.

Forecast Q4 largely in line with consensus, with adj. EBITDA up 16% Y/Y. We forecast Q4 revenue of C$190MM, slightly below consensus at C$193MM, with Y/Y growth slowing to 8% from 11% Q3. Our outlook calls for 1% organic growth, largely stable with Q3 (0.5%), though below the TTM average of 6% due to elongated procurement decisions at the Canadian federal government. Due to modest Y/Y margin expansion (primarily at ITCS), we expect adj. EBITDA to increase 16% Y/Y to C$23.6MM, in line with consensus at C$23.5MM. As a result, we forecast adj. EPS of C$1.24, effectively matching consensus (C$1.22). Our outlook calls for FY24 at C$755MM revenue and C$86MM adj. EBITDA, towards the low end of FY24 guidance for C$750-810MM revenue and C$86-92MM adj. EBITDA.

We anticipate FY25 guidance in line with consensus. Calian typically provides annual guidance for the upcoming year when it reports Q4. Calian has not announced an acquisition since the C$32MM acquisition of Mabway in May. Since consensus already includes contribution from Mabway (and no unannounced acquisitions), we expect FY25 guidance to bracket consensus. Specifically, we expect Calian to guide FY25 to C$800-830MM revenue and C$92-100MM adj. EBITDA, bracketing consensus at C$823MM and C$96MM, respectively. The mid-point of expected guidance implies 8% Y/Y revenue growth, down from 15% in FY24, as Calian laps contributions from four acquisitions in FY24. Our expectations for FY25 guidance are based on 2-6% organic growth and 11.5-12.0% adj. EBITDA margins, which compares to 4% and 11.4% in FY24. Positively, Calian announced it secured C$29MM of defense contracts in Q4 and a 58% Q/Q increase in contracts at its nuclear and engineering services business. The contract awards may indicate that the procurement environment has incrementally improved.

Advanced Technologies (AT) forecast to remain sequentially flat. We forecast AT revenue of C $52MM Q4 (-2% Q/Q), which is effectively flat with the TTM average (C$52MM). Our outlook implies Y/Y growth falls to -2% from 17% in Q3, primarily as AT laps contribution from the C $47MM acquisition of HPT, which closed on August 1, 2023. Organically, we assume 0% organic growth, up slightly from -2% in Q3. Additionally, we assume the acquisition of MDA’s nuclear assets adds C$1.7MM revenue Q4, flat with Q3.

We expect Health growth to slow on tougher comparables. We forecast Health revenue up 8% Y/Y to C$56MM (-1% Q/Q), with Y/Y growth slowing from 14% in Q3 due to tougher Y/Y comparables (31% Q4/FY23 vs. 23% Q3/FY23). Given that Calian has not made an acquisition in Health since 2020, estimated growth of 8% Y/Y is entirely organic. We expect organic growth in Health to be the highest across all of Calian's segments for another consecutive quarter. Looking ahead, we believe Calian is likely to sustain positive Health organic growth through the release of new pharma solutions.

Learning organic growth is likely negative. We forecast Learning revenue up 24% Y/Y to C$30MM (+10% Q/Q), an increase from 2% last quarter. The uplift reflects a full quarter of revenue from the Mabway acquisition, which we estimate to add C$9MM in Q4, up from C$4MM in Q3. Organically, we expect Learning to remain soft at -12% Y/Y, compared to -14% Q3 due to short- term budget constraints and procurement delays at the Canadian federal government.

We anticipate organic growth to remain muted at ITCS. We forecast ITCS revenue up 11% Y/Y to C$53MM, an improvement from C$49MM (7% Y/Y) in Q3. Even though Y/Y comparables are easier (-31% Q4/FY23 vs. -6% Q3/FY23), we think organic growth is likely to remain muted at 1% Q4 vs. -3% Q3. Regarding the C$50MM acquisition of Decisive, we expect Decisive to contribute C$4.6MM revenue, flat with Q3.

We expect adj. EBITDA up 16% Y/Y due to improved profitability at ITCS. Our forecast calls for adj. EBITDA up 16% Y/Y to C$21MM, with margins up 80 bps Y/Y. The improvement primarily stems from ITCS, which we forecast to see 500 bps of Y/Y margin expansion, as ITCS benefits from seasonality (Q3 is typically a trough) and improved short-term execution (ITCS was below expectations in Q3). Due to working capital, we forecast C$8MM operating cashflow and C$5MM free cashflow, down from C$23MM and C$20MM, respectively, in Q4/FY23. Following C$3MM dividends, we forecast net debt to remain flat at C$48MM; leverage is likely to remain at 0.5x NTM net debt/EBITDA.

Maintain Outperform. Our Outperform thesis on Calian reflects: 1) continued compounding of capital through acquisitions; 2) an expected recovery in organic growth; and 3) valuation at 7.0x NTM EV/EBITDA is below peers.