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CAE awaits recovery

It seemed 2022 would be the year to rebound, but global events got in the way.

CAE Inc. absorbed the full force of the pandemic, but with reopening 2022 seemed likely to be a year to rebound.

But it didn’t happen. The late 2021 optimism was overrun by a deepening global pessimism and shares of the global leader in flight training ended the year down 18%.

So, what went wrong?

Initially, optimism faded as inflation accelerated and interest rates rose in response. Russia’s invasion of Ukraine caused shocks to food and fuel supplies. Covid was down, but not out, especially in China. Airlines were caught short staffed leading to flight and baggage delays.

Even as air travel resumed, supply chain bottlenecks caused problems with parts and delivery of flight simulators. A one-time write down of costs associated with several defence contracts unnerved investors.

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So, all in all it was an uneven year.

But taking a closer look, there is plenty to be optimistic about. CAE used the pandemic to make strategic investments that have boosted its competitive edge and laid the groundwork for future gains.

That means 2023 could be a far better year. Here’s a closer look:

CAE (TSX, NYSE: CAE) Closed Friday at C$28.40, US$21.24.

Background: CAE is the world’s largest maker of flight simulators used to train civilian and military pilots. Commercial aviation is about 55% of revenue, military is 45%, and healthcare and medical simulation about 5%. About 90% of revenues come from outside Canada with a large portion in emerging markets.

Performance: CAE’s shares fell 16% in 2022 and have rebounded slightly with the current rally.

Recent developments: In November, CAE reported better-than-expected revenue and earnings for its second quarter 2023, as air travel returned to pre-pandemic levels and sales to military clients improved. Revenue jumped 22% to $993 million, which exceeded forecasts, and earnings before unusual items improved 12%, to $0.19 a share.

Discussion & outlook: CAE gets most of its revenue from recurring contracts and will continue to benefit as the airline industry regains its footing. The company has roughly 70% of the global flight simulator market for military and civilian applications.  

It is benefitting from several trends. One is rising affluence in emerging markets. Another is strong demand for military training. Russia’s invasion of Ukraine will likely increase demand for military simulators as the NATO alliance improves its readiness. The Canadian government extended the contract for CAE to manage and operate the NATO Flying Training in Canada (NFTC) program through 2027. The program trains Canadian and other NATO pilots.

CAE used the pandemic to strengthen its leading position in commercial aviation, making nine acquisitions in 18 months. The 2021 acquisition for US$1.05 billion of the military training operations of L3Harris Technologies Inc. is one of them. L3 Harris makes simulators for drones, submarines, and aircraft, as well as offering flight training to the US Air Force.

In August 2022, CAE signed 15-year agreement with the Qantas Group, to develop and operate a new state-of-the-art pilot training centre in Sydney, Australia, adding to its 35 global training centres. 

CAE continues to expand its line of medical simulators and training programs. It uses 16 different mannequins to train paramedics, nurses, and medical students, helping them diagnose a variety of conditions. This is an evolving and growing business.

There is no indication when its dividend will be restored.

This article appeared in the Internet Wealth Builder on Jan. 16, 2022.  For information on how to reprint this article please view this page.

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Adam Mayers writes about investing and personal finance. He is a contributor to the Globe & Mail’s Globe Advisor and a contributing editor to Gordon Pape's Internet Wealth Builder newsletter. Adam was Business Editor and investment columnist at The Toronto Star and is the author of six books.

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