(Montreal) The threat of a budgetary paralysis hanging over the United States is slowing down the recovery of CAE’s defense sector activities, which is banking on obtaining new, more profitable military contracts to put the difficulties of this division behind it.
The flight simulator specialist revealed better than expected results in its civil activities on Tuesday, but the defense segment eclipses this outperformance.
The defense division improved its operating margins to 4.5% in the second quarter ended September 30 from 4.2% in the same period last year. However, analysts anticipated a greater improvement and forecast margins of 5.2% on average, according to Desjardins Capital Markets.
In comparison, margins for the civil aviation sector are 20%, compared to 20.6% in the same period last year.
CAE is experiencing difficulties on certain contracts due to inflation and labor scarcity. The Montreal company had already raised this problem last year and hoped to rectify the situation during the current financial year which ends on March 31, 2024.
Political instability in Washington, however, is slowing down the obtaining of new contracts that the company hopes will be more profitable. “The turnaround we hoped for this year in the defense sector has been delayed,” explains President and CEO Marc Parent during a conference with financial analysts.
“We believe we will continue to make progress in transforming our business by replenishing our backlog with more profitable programs and ending low-margin contracts. This should lead us to a substantially larger and more profitable business. »
Forecast 2025
Mr. Parent was asked about the company’s forecasts for 2025. Management wants to increase its earnings per share at a rate of 25% over three years (from fiscal year 2022 to 2025).
The leader acknowledged that the difficulties in the defense sector represented a risk, but the target remains the same for the moment. “As we get closer to fiscal year 2025, if we need to provide more details, we will. »
Mr. Parent also put into perspective the impact of the sale of the health division on the company’s forecasts. “It’s not nothing, but it’s relatively minimal in terms of the impact on the forecasts we gave and the spinoffs from the sale. »
At the end of October, CAE announced that it was selling its healthcare division to the American company Madison Industries. The transaction is estimated at 311 million.
Civilian results eclipsed
For all of its activities, CAE revealed results above expectations thanks to its activities in the civil aviation segment, but this outperformance did not convince investors.
The company revealed a net profit of 58.4 million, an increase of 31% compared to last year. Adjusted diluted earnings per share were 27 cents. Revenues, for their part, increased by 10% to 1.09 billion.
Before the results were released, analysts expected earnings per share of 20 cents and revenue of 1.06 billion, according to financial data firm Refinitiv.
However, better than expected results are not interpreted as such by investors. “Weak defense and delayed margin recovery could limit investor enthusiasm for the strength of the civilian segment,” said analyst Tim James of TD Securities.
CAE shares lost $1.34, or 4.44%, to $28.87 on the Toronto Stock Exchange at the end of Tuesday’s trading.