CAE Initiating Coverage -- RBC

EQU

ITY

RESE

ARC

H RBC Dominion Securities Inc.Steve Arthur, CFA (Analyst)(416) [email protected] Goel (Associate)(416) [email protected]

Anthony Jin, CFA, P.Eng.(Associate Analyst)(416) [email protected]

OutperformTSX: CAE; CAD 11.89; NYSE: CAE

Price Target CAD 14.00WHAT'S INSIDE

Rating/Risk Change Price Target Change

In-Depth Report Est. Change

Preview News Analysis

Scenario Analysis*

DownsideScenario

10.0014%

CurrentPrice

11.89

PriceTarget

14.0020%

UpsideScenario

16.0037%

*Implied Total Returns

Key StatisticsShares O/S (MM): 261.5Dividend: 0.24Float (MM): 253.6Debt to Cap: 47%

Market Cap (MM): 3,109Yield: 2.0%Enterprise Val. (MM): 3,759Avg. Daily Volume (MM): 0.68

RBC EstimatesFY Mar 2013A 2014E 2015E 2016ERevenue 2,104.5 2,132.6 2,277.6 2,371.9Prev. 2,166.4 2,253.0 2,299.3EBITDA 471.9 454.9 534.5 580.4Prev. 458.2 530.0 571.6EV/EBITDA 8.0x 8.3x 7.0x 6.5xPrev. 8.2x 7.1x 6.6xEPS, Adj Diluted 0.67 0.67 0.84 0.96Prev. 0.83 0.93P/AEPS 17.7x 17.7x 14.2x 12.4x

Revenue Q1 Q2 Q3 Q42013 480.1A 514.4A 522.1A 587.9A2014 530.4A 487.5A 537.0E 577.7EPrev. 550.6E 597.9E2015 554.8E 548.6E 579.0E 595.1EPrev. 539.7E 541.4E 570.6E 601.3EEBITDA2013 112.0A 115.1A 115.7A 129.1A2014 102.5A 105.7A 117.6E 129.2EPrev. 118.2E 131.8E2015 125.2E 126.8E 137.9E 144.6EPrev. 121.7E 124.6E 136.7E 147.0ERevenue: Financial results were restated in FQ1/14 reflecting changes inreporting due to the adoption of IFRS 11 and the amended IAS 19.All values in CAD unless otherwise noted.

December 4, 2013

CAE Inc.Taking Flight - Part 1: Assessing long-term earningsscenariosOur view: We see CAE as a business to own, and one now tradingat attractive valuation levels. Near-term, we expect solid marginimprovement following recent restructuring efforts, and we expect theshares to react positively to growing evidence of these margin gains. Weassess long-term earnings scenarios and see plausible operating metricsyielding $18–24 share prices over the next 3–4 years.

Key points:• Examining key business drivers – earnings and share price impact of

various scenarios: We review the market position and drivers for CAE’sbusiness units and assess the earnings sensitivity to key assumptions: 1)Civil margins; 2) higher efficiency of Civil training centres; 3) growth inCivil FFS sales; and 4) stabilization (then gradual growth) in the militarybusiness; and 5) varied trading multiples.

• Near-term margin improvement (i.e., reaching the "high teens" inCivil) could add another $1 to share price target: We believe that muchof the restructuring and simulator relocation work has been completedand should translate to sustained Civil operating margin improvement(particularly Civil Training & Services). Our current forecast reflectsimprovement, although it is conservatively below management’sexpectation of "high teens" Civil margins starting F2H/14E. Using theirexpectations, we see an incremental $0.04–0.08 in F2015E EPS, or ~$0.50–1.00 to the price objective.

• Five-year earnings outlook points to $20–22 share price (15–20%annual returns); various operating scenarios point to $18–24 range:A medium-term (five-year) outlook to C2018E yields a 5.5% revenueC13E–C18E CAGR, driving EPS CAGR of 14.8%. Applying currentmultiples suggests a 3- to 4-year target of $20–22 on C2018E EPS of ~$1.30. We assess the sensitivity to these estimates by varying:• Operating parameters:

• Civil Training & Service: varying utilization rate and deploymentof simulators is the greatest driver of earnings variation. Plausiblesituations suggest a -$0.25 to +$0.29 variance in EPS, or -$3.25 to+$4.00 variance in share price.

• Civil Simulation Products (simulator sales and ASPs): -$1.75 to +$1.00 variance in share price

• Military (training backlog and simulator bookings): -$1.00 to +$1.75 variance in share price.

• Trading multiples, which yields plausible 3- to 4-yr values of ~$18–24• Strong business, solid growth outlook, attractive valuation: We see

CAE as a business to own, and at current levels valuation appearsattractive. CAE now trades at a material discount to A&D peers (12.7xP/E and 6.6x EV/EBITDA C2015E versus A&D peer averages of 14.2x and8.9x, respectively). We expect this gap to narrow with growing evidenceof operating margin improvement over the next several quarters, andwe recommend investors build positions ahead of that.

Priced as of prior trading day's market close, EST (unless otherwise noted).For Required Non-U.S. Analyst and Conflicts Disclosures, see page 21.

Target/Upside/Downside Scenarios

Exhibit 1: CAE Inc.

20.00

15.00

10.00

5.00

0.00Current Share Price

11.89

Price Target

14.00

Upside Scenario

16.00

Downside Scenario

10.00

Shar

e Pr

ice

(CA

D/s

h)

Source: RBC Capital Markets estimates

Target price/ base caseOur base case reflects a 6% revenue CAGR (F2013–F2016E)for Civil driven by robust long-term fundamentals, offset by3% expected annual declines in Military through F2016E.We expect New Core Markets to grow at a fairly robustpace of ~13% y/y through F2015E. Our forecasts incorporate:1) recovery of Civil operating margins to ~18%; 2) Militaryoperating margins of 13–14%; and 3) NCM operating marginsof ~6–10%. We value CAE based on an average of our DCFmodel, 15.0x P/E, and 8x EV/EBITDA applied to our estimateson a rolling 2Y forward basis.

Upside scenarioOur upside scenario reflects higher rates of growth in Civil(6–7% CAGR F2013A–F2016E) and slight decline in Military.Our forecasts incorporate: 1) expectations of increasedpenetration of simulated training in Military (particularly theUS), which should largely offset the expected declines inoverall force structure and budget; and 2) modest marginexpansion of ~0.5–1.0% on higher revenues. On highergrowth, we value CAE on 17.0x P/E, 8.5x EV/EBITDA, and ourDCF model.

Downside scenarioOur downside scenario incorporates more conservativeoutlook for Civil (2% revenue CAGR F2013A–F2016E), withdeclines in Military intensifying (-8% revenue CAGR F2013A–F2016E). We expect resilient growth in NCM of ~10% annuallyto offset some of these declines. However, on lower revenuesand expectations of pricing/competitive pressures, we alsoexpect margin compression of 3–4% in Civil and ~3% inMilitary. On lower growth and intensifying headwinds fromMilitary, we value CAE on 13.0x P/E, 6.5x EV/EBITDA, and ourDCF model.

Investment summaryCAE is a very strong business, a global leader in simulation-based technology and training services. Over the pastyear, CAE has been actively addressing end-market realities:military delays, softness in European demand, and integrationof Oxford Aviation.

After several quarters of restructuring and relocatingsimulators, we believe that much of that work is nowcomplete, and we should see these redeployed simulators(~20 full flight simulators) begin contributing materially torevenue and margins in F2H/14E.

We expect the shares to react positively on growing evidenceof margin improvement and recomend that investors buildpositions ahead of that at currently attractive valuation levels.

Furthermore, we see positive secular growth drivers in CAE'sCivil business (both flight simulator equipment and trainingservices) and expect outperformance over the longer term,driven by growing aircraft deliveries and pilot shortages,particularly in Asian and Emerging Markets. We expect thisshould more than offset expected declines in Military.

Key Considerations and Earnings DriversWe would consider: 1) Civil air traffic demand growth andairline utilization, leading to growth in aircraft fleet; 2)shortage/surplus status of pilots, air crews, and technicians; 3)state of military budgets globally—we expect declines in theUS and Western Europe, partially offset by growth in Asia andother International markets; 4) contract order flow in both theCivil and Military segments; and 5) operational improvements,leading to margin expansion (in particular in the Civil trainingsegment).

CAE Inc.

December 4, 2013 Steve Arthur (416) 842-7844; [email protected] 2

CAE – A diversified business mix Over the past decade-plus, CAE has made solid strides to diversify its business. While many still associate CAE with Full Flight Simulator (FFS) sales, that segment now represents less than one-quarter of the business. Simulator development and sales are clearly core capabilities, but CAE’s business is now spread across three key areas:

Civil serves commercial aviation markets and includes both Civil Simulation Products and Civil Training and Services. Bolstered by the acquisition of Oxford Aviation, the Civil segments now contribute ~56% of total revenue.

Military includes Military Training and Services and Military Simulation Products. This business is supported by a large backlog in this sector but has been affected by deferrals in order flow given ongoing government budget issues.

New Core Markets is a relatively new business segment offering simulation technology for training in the healthcare and mining industries. This division contributes a relatively small (6%) share of revenue.

Exhibit 2: CAE’s F2014E revenue mix

New Core Market

6%

Military Training &

Services

12%

Military Simulation

Products

26%

Civil Training &

Services

33%

Civil Simulation

Products

23%

Source: Company reports, RBC Capital Market estimates

CAE’s global footprint and favourable industry dynamics expected to drive growth CAE has been a leading player in the industry for more than 50 years. Its legacy and scale offer a number of significant competitive advantages:

Global footprint: CAE has been serving carriers and government organizations in most regions of the world for many decades.

Established customer relationships: Airlines rely on CAE’s services and technology for their most important consideration—safety.

Market leadership: CAE’s scale enables it to invest heavily in R&D to drive technology advances for the industry. It also facilitates stronger margin performance, with fixed costs and investments spread across a wider business base.

While many still associate CAE with Full Flight Simulator sales, that segment now represents less than one-quarter of the business

Key competitive advantages:

1) Global footprint

2) Market leadership

3) Established customer relationships

4) Technology platform and R&D investments

CAE Inc.


Key business segments and drivers Civil Training and Services Although a very fragmented market, CAE and its JVs command an 18% share of the market by number of simulators operated. Moreover, CAE (along with its JVs) has the most extensive global network of training locations (~50 locations globally. The next largest, FlightSafety, has 36 locations, largely in continental US). Importantly, CAE is well-established in the higher-growth regions, including Asia and the Middle Eastern regions.

Exhibit 3: Civil Training & Services – CAE operates 18% of industry installed simulator base

CAE

18%

FSI Training Centre

19%

Boeing Flight

Services

4%Pan Am/ANA

4%

Airlines

32%

Others

23%

Note: CAE, FSI, and Boeing market shares include their respective JV centres with other airlines/manufacturers Airlines also includes cargo carriers such as Fedex and UPS, and Helicopter operators Source: Halldale and RBC Capital Markets estimates

Exhibit 4: CAE is more geographically diverse relative to industry competitors

40%

10%

29%

88%

43%

75%

41%

30%

37%

10%

21%

7%

44%

21%34%

17% 6%12% 7%

25%

1% 2%1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

CAE Training Centres CAE JVs CAE (Total) FSI Training Centres Boeing Flight

Services

Pan Am/ANA

Shar

e o

f O

pe

rate

d

Sim

. B

ase

North America Europe APAC & North Asia Middle East & Africa LATAM & Caribbean

Source: Halldale, RBC Capital Markets

CAE Inc.


The Civil Training and Services market is expected to see continued growth, driven by several key industry factors:

Global pilot shortage: Aging pilots in developed countries and fleet expansions in emerging economies have led to a strong demand for new and experienced pilots. Boeing estimates the requirement for ~500K new pilots in the next 20 years, largely from the Asia Pacific region (Exhibit 5).

Changing regulations on pilot licensing: Some recent changes in training requirements, particularly the US FAA mandating 1,500 hours of flight training (or the ATP License) for commercial airline co-pilots (as compared to the earlier requirement of a Commercial Pilot License and ~250 hours of minimum flying time) would have a favourable impact on training centres.

Exhibit 5: Boeing estimates demand for 498,000 Pilots from 2013 through 2032 globally

Asia Pacific

39%

Europe

20%

North America

17%

Latin America

10%

Middle East

8%

Africa

3% CIS

3%

Source: Boeing

Civil Simulator Products CAE is the dominant player in the development of Full Flight Simulators, with an estimated ~70% share of recent orders and ~50% share of FFS currently in use globally.

Multiple drivers of flight simulation and training:

1) Pilot demographics

2) Regulated training requirements

3) Passenger traffic

4) Aircraft deliveries

CAE Inc.


Exhibit 6: CAE has ~50% share of the globally installed simulator base (as of October 2013)

Others

9%

L-3 Link

21%

FSI

23%

CAE

47%

Source: Halldale and RBC Capital Markets estimates

The Civil FFS industry is driven by a number of factors:

Global growth in passenger air traffic.

Growth in aircraft deliveries and airline fleet sizes, and correspondingly increased production targets by Airbus and Boeing.

Introduction of new aircraft types.

Pilot demographics and training requirements, as discussed above.

Exhibit 7 highlights the RBC Capital Markets A&D team’s aircraft delivery forecast for the Boeing and Airbus companies, expected to grow at a CAGR of ~3%. Exhibit 8 shows that over a 20-year time period, Boeing and Airbus estimate the overall global fleet size to double.

Exhibit 7: Airbus and Boeing aircraft delivery forecast Exhibit 8: 20-year growth outlook for global fleet size

588 618 629 664 676 711 730 731 737

601 650751 758 758 755 764 774 791

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

20

12

A

20

13

E

20

14

E

20

15

E

20

16

E

20

17

E

20

18

E

20

19

E

20

20

E

No

. o

f A

ircr

afts

Airbus Boeing

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

Current Fleet Size

(2012)

Total Cumulative

Deliveries (2013-

2032)

Total Fleet Size

(2032)

No

. o

f A

ircr

afts

~18,000-20,0000

Replacement

Demand

Growt h

Demand

~36,000-41,000

Source: Company reports and RBC Capital Markets A&D team estimates Source: Airbus and Boeing market outlook, RBC Capital Markets estimates

CAE Inc.


Military business While this sector is impacted by declining defence budgets, CAE is shielded (to some extent) by its geographical footprint and established relationships. CAE has clearly felt a slowdown in order flow, largely a result of decisions being deferred rather than contracts being lost.

To defend margins in the current environment, CAE has recently undertaken extensive restructuring efforts, particularly in its European facilities.

CAE continues to have a very active pipeline, however, and has continued to secure contracts with military organizations in the US and around the globe.

Exhibit 9: The United States accounted for only ~30% of Military revenue in F2011

United States

30%

Europe

38%

ROW

32%

Source: Company reports, RBC Capital Markets

A recent military simulator census (conducted by Flightglobal) shows that CAE is the second-largest in the military simulation market with a 16% share of the 1,600+ installed military simulator base, next only to L-3 Link with a 21% market share (Exhibit 10).

The Military business now represents a smaller share of CAE’s revenue (~38% as compared to historical levels of 50%+), and we expect lower growth from this segment over the next several years.

Exhibit 10: Military Simulation Products – market share based on installed simulator base

Others

27%

Boeing

11%

FSI

12%Thales

13%

CAE

16%

L-3 Link Simulation

& Training

21%

Source: Flightglobal, RBC Capital Markets

CAE Inc.


Base forecast suggests solid revenue (+4% CAGR) and earnings (+13%) growth Recent moves should support revenue growth and margin expansion Over the past year, CAE has been actively addressing end-market realities: military delays, soft European demand, and integration of a major acquisition (Oxford Aviation). We have seen restructuring and operational streamlining, including the relocation of simulators from areas with overcapacity in the training network to regions with stronger demand. With much of that work now completed, we expect to see increased top-line and margin growth over the next several quarters.

For our F2016E (ended March) outlook, we expect revenue to increase at a CAGR of 4.1%, largely driven by growth in the Civil Business (F2013–F2016E CAGR of 6.7%) and offset by modest annual declines in CAE’s Military divisions. We expect steady margin improvements, with corporate operating margins expected to improve toward ~17% by F2016E.

Exhibit 11: CAE forecast F2014E–F2016E

INCOME STATEMENT ($MM)

CAE Inc. (Year End March 31) Jun-13 Sep-13 Dec-13 Mar-14 CAGR

F2013A Q1/14 Q2/14 Q3/14E Q4/14E F2014E F2015E F2016E F13-F16E

Revenue Summary:

Civil Simulation Products Revenues 402 124 103 127 137 491 527 511 8.3%

Civil Training & Services Revenues 756 178 166 181 192 718 812 897 5.9%

Military Simulation Products Revenues 562 138 124 133 149 544 545 547 (0.9%)

Military Training & Services Revenues 273 61 68 65 68 262 264 271 (0.3%)

New Core Markets 112 30 27 31 31 119 131 146 9.2%

Revenues 2,105 530 488 537 578 2,133 2,278 2,372 4.1%

Total Operating Costs 1,633 428 382 419 449 1,678 1,743 1,791 3.1%

Total Depreciation & Amortization 157 40 41 39 43 162 176 189

EBITDA 472 103 106 118 129 455 534 580 7.1%

Total EBITDA Margin % 22.4% 19.3% 21.7% 21.9% 22.4% 21.3% 23.5% 24.5%

EBIT 315 63 65 79 86 293 358 391 7.6%

Total EBIT Margin % 14.9% 11.8% 13.4% 14.7% 14.9% 13.7% 15.7% 16.5%

Adjusted Net Income 174 37 38 46 52 174 220 251 13.0%

Adj. Net Income Margin % 8.3% 7.1% 7.9% 8.6% 9.0% 8.2% 9.7% 10.6%

EPS (F.D) $0.54 $0.18 $0.15 $0.18 $0.20 $0.70 $0.84 $0.96

Adj. EPS (F.D) $0.67 $0.14 $0.15 $0.18 $0.20 $0.67 $0.84 $0.96 12.7%

Dividends Per Share $0.19 $0.05 $0.05 $0.06 $0.06 $0.22 $0.24 $0.24 8.1%

Wtd. Avg. Shares O/S (Basic) (in MMs) 259.0 260.2 261.0 261.0 261.0 261.0 261.0 261.0

Wtd. Avg. Shares O/S (FD) (in MMs) 259.4 260.2 261.5 261.5 261.5 261.5 261.5 261.5

Source: Company reports, RBC Capital Markets estimates

Solid cash flow drives balance sheet improvement post-Oxford In May 2012 (mid-FQ1/13), CAE acquired Oxford Aviation for $314MM, funded by a new senior unsecured credit facility. This acquisition increased CAE’s Net Debt to just under $1B, (or 2.2x Net Debt/EBITDA). Deleveraging of balance sheet remains a current priority for management. We have seen the company tracking well on this measure, having met its target of <40% net debt to capital ratio in FQ2/14.

We expect the balance sheet to continue to improve, gradually returning to its pre-acquisition levels of net debt/EBITDA and a better free cash flow position.

We expect revenue to increase at a CAGR of 4.1%, and operating margins to improve toward ~17% by F2016E

Solid cash flows support deleveraging (Net Debt/EBITDA now 1.9x) and dividend increases

CAE Inc.


Exhibit 12: Net debt declining after spike in F2013 Exhibit 13: Improving cash flow position

0100

200300400500

600700800

9001000

F20

11

A

F20

12

A

F20

13

A

F20

14

E

F20

15

E

F20

16

E

Ne

t D

eb

t ($

MM

)

-

0.5x

1.0x

1.5x

2.0x

2.5x

Ne

t D

eb

t/EB

ITD

ANet Debt Net Debt/EBITDA

Oxford

Acquisition

132

6848

141

211

236

0

50

100

150

200

250

300

F2011A F2012A F2013A F2014E F2015E F2016E

Fre

e C

ash

Flo

w (

$M

M) Oxford

Acquisition

Source: Company reports, RBC Capital Markets estimates Source: Company reports, RBC Capital Markets estimates

In addition, CAE has seen increasing dividends in the last five-year period, and it recently announced another quarterly increase of 20%. We see this as a positive sign and a reflection of management’s confidence in operational improvements and focus on cashflow.

Exhibit 14: Increasing dividends over the years

0.12

0.150.16

0.19

0.220.24 0.24

-

0.05

0.10

0.15

0.20

0.25

0.30

F2010A F2011A F2012A F2013A F2014E F2015E F2016E

Div

ide

nd

Pe

r Sh

are

($

)


CAE Inc.


Valuation attractive relative to A&D peers CAE has historically traded at a premium valuation versus peers, supported by its unique technology base and market position (Exhibit 15). However, with recent operational issues, CAE’s shares have lagged A&D peers. Currently, CAE trades at 6.6x C2015E EV/EBITDA and 12.7x C2015E P/E, a material discount relative to US Aerospace peers (9.3x C2015E EV/EBITDA and 15.0x C2015E P/E).

We expect the valuation gap to narrow as evidence builds regarding operational and margin improvements. As seen in Exhibit 16, our estimates suggest an EBITDA CAGR of 12.0% (C2013E–15E) for CAE, significantly higher than the 11.3% and 4.6% forecasts for the Aerospace and Defence peer groups, respectively, over the same period.

Exhibit 15: CAE has historically commanded a premium valuation relative to the Aerospace & Defense peer group

Forward EV/EBITDA multiples

4.0

6.0

8.0

10.0

12.0

14.0

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

EV/E

BIT

DA

(N

TM)

CAE-T A&D Peer Group Average

Forward P/E multiples

5.0

10.0

15.0

20.0

25.0

30.0

Jan

-05

Jul-

05

Jan

-06

Jul-

06

Jan

-07

Jul-

07

Jan

-08

Jul-

08

Jan

-09

Jul-

09

Jan

-10

Jul-

10

Jan

-11

Jul-

11

Jan

-12

Jul-

12

Jan

-13

Jul-

13

P/E

(N

TM)

CAE-T A&D Peer Group Average

Source: ThomsonOne, Company reports, RBC Capital Markets estimates

CAE Inc.


Exhibit 16: Comparable companies – CAE trades at a material discount to Aerospace peers

Defense Companies Thomson Mkt Cap EV

2013E-

15E EPS P/E

2013E-

15E

EBITDA EV/EBITDA

2013E-

15E

Revenue

Company Name Ticker Price** (US$MM) (US$MM) CAGR CY2013 CY2014CY2015 CAGR CY2013 CY2014CY2015 CAGR

General Dynamics Corp GD-N $90.34 31,884 32,034 7.1% 13.8x 12.5x 12.0x 2.6% 7.8x 7.4x 7.4x (0.8%)

Lockheed Martin Corp LMT-N $138.77 45,447 48,942 13.3% 16.0x 13.6x 12.5x 4.1% 9.3x 8.2x 8.5x (0.3%)

Northrop Grumman Corp NOC-N $112.52 26,724 27,749 14.1% 15.6x 13.4x 12.0x 4.2% 8.7x 8.0x 8.0x (1.8%)

Raytheon Co RTN-N $88.78 28,703 29,709 15.8% 16.9x 14.2x 12.6x 9.3% 9.7x 8.6x 8.1x (1.0%)

Harris Corp HRS-N $64.21 6,890 8,223 2.1% 14.0x 13.4x 13.5x (2.1%) 7.5x 7.7x 7.8x (0.9%)

L-3 Communications Holdings IncLLL-N $102.68 9,375 12,714 3.9% 13.2x 12.6x 12.2x (0.7%) 8.9x 8.9x 9.1x (1.7%)

Science Applications International CorpSAIC-N $34.76 1,703 1,704 12.4% 14.0x 11.9x 11.1x 10.5% 8.1x 6.9x 6.7x (1.4%)

Alliant Techsystems Inc ATK-N $120.39 3,899 4,951 16.0% 14.5x 11.8x 10.8x 8.8% 7.7x 6.8x 6.5x 4.7%

Caci International Inc CACI-N $72.13 1,791 2,310 (3.1%) 12.2x 12.5x 13.0x (2.9%) 7.2x 7.4x 7.6x (2.0%)

Curtiss-Wright Corp CW-N $52.16 2,507 3,256 13.1% 18.9x 16.0x 14.7x 4.2% 9.3x 8.7x 8.5x 3.3%

Exelis Inc XLS-N $17.44 3,362 3,702 5.6% 12.0x 11.0x 10.8x 1.6% 6.2x 5.9x 6.0x (2.5%)

Huntington Ingalls Industries Inc HII-N $83.00 4,200 5,113 37.1% 21.9x 13.7x 11.7x 17.6% 8.5x 6.7x 6.2x (0.1%)

Mantech International Corp MANT-O $28.19 1,048 989 (4.8%) 13.8x 15.3x 15.2x (6.0%) 5.8x 6.3x 6.5x (4.4%)

Teledyne Technologies Inc TDY-N $90.47 3,447 4,051 8.2% 19.4x 18.0x 16.6x 9.2% 12.1x 10.7x 10.2x 3.7%

Defence Wtd. Average 12.9% 15.5x 13.4x 12.4x 4.6% 8.8x 8.0x 8.0x (0.7%)

Cae Inc CAE-T $11.89 2,923 3,534 19.4% 18.1x 14.8x 12.7x 12.0% 8.3x 7.2x 6.6x 3.0%

Aerospace Companies Thomson Mkt Cap EV

2013E-

15E EPS P/E

2013E-

15E

EBITDA EV/EBITDA

2013E-

15E

Revenue

Company Name Ticker Price** (US$MM) (US$MM) CAGR CY2013 CY2014 CY2015 CAGR CY2013 CY2014 CY2015 CAGR

Boeing Co BA-N $132.00 101,521 95,322 10.9% 19.6x 17.6x 16.0x 13.5% 11.8x 9.8x 9.2x 4.2%

Honeywell International Inc HON-N $87.07 69,403 72,094 10.9% 17.6x 15.7x 14.3x 6.5% 10.3x 9.8x 9.1x 3.0%

Precision Castparts Corp PCP-N $256.36 37,557 41,105 26.3% 26.3x 18.8x 16.5x 13.8% 14.5x 12.6x 11.2x 5.5%

United Technologies Corp UTX-N $109.69 100,268 118,481 11.5% 17.8x 16.0x 14.3x 8.9% 10.7x 9.8x 9.0x 2.1%

Embraer Sa ERJ-N $30.03 5,559 9,281 11.4% 12.0x 10.0x 9.7x 11.7% 10.5x 9.2x 8.4x 3.9%

Bombardier Inc BBD'B-T $4.65 7,617 11,844 18.9% 12.4x 10.0x 8.8x 12.0% 8.8x 7.7x 7.0x 5.6%

Rockwell Collins Inc COL-N $72.47 10,305 10,913 6.5% 15.8x 15.8x 13.9x 9.0% 10.2x 9.3x 8.6x 5.2%

B/E Aerospace Inc BEAV-O $86.20 8,965 10,351 19.7% 24.3x 19.8x 16.9x 17.3% 14.6x 12.2x 10.6x 9.2%

Heico Corp HEI-N $55.24 3,702 4,174 16.0% 37.0x 31.7x 27.5x 11.6% 18.8x 16.6x 15.1x 7.0%

Hexcel Corp HXL-N $43.13 4,386 4,593 14.5% 23.4x 20.5x 17.8x 13.0% 13.4x 11.8x 10.5x 5.9%

Spirit Aerosystems Holdings Inc SPR-N $31.78 4,557 5,292 138.5% 63.4x 11.9x 11.2x 61.4% 16.3x 6.6x 6.2x 5.0%

Wesco Aircraft Holdings Inc WAIR-N $20.43 1,960 2,479 14.2% 17.0x 14.7x 13.0x 11.1% 12.2x 11.0x 9.9x 5.8%

Aerospace Wtd. Average 14.8% 19.9x 16.7x 15.0x 11.3% 11.6x 10.1x 9.3x 3.8%

Wtd. Average (Peers) 18.5x 15.7x 14.2x 9.1% 10.7x 9.4x 8.9x 2.3%

Cae Inc CAE-T $11.89 2,923 3,534 19.4% 18.1x 14.8x 12.7x 12.0% 8.3x 7.2x 6.6x 3.0%

Source: ThomsonONE, RBC Capital Markets estimates

CAE Inc.


Reiterating Outperform rating and $14 price target Our price target is derived based on an average of our DCF model, 15x P/E and 8.0x EV/EBITDA multiples applied to our rolling two-year forward estimates. These multiples are roughly in line with A&D peers, although we would argue that a modest premium would be justified based on CAE’s leading market position, unique technology base, global footprint, longstanding customer relationships, and solid earnings growth trajectory.

We expect that the shares will react positively to growing evidence of operating margin improvement over the next several quarters, and we recommend investors build positions ahead of that.

Exhibit 17: Reiterating Outperform and $14 price target

PRICE TARGET Implied Price Based On P/E Implied Price Based On EV/EBITDA Implied Price Based On DCF

Average Implied Price: $14.46 P/E Multiple: 15.0x EV/EBITDA Multiple: 8.0x WACC: 9.6%

Target Price: $14.00 Q2/15E - Q1/16E EPS $0.88 Q2/15E - Q1/16E EBITDA 548.7 Terminal Growth Rate: 3.0%

Calculated Target Price: $13.23 Calculated Target Price: $15.01 Calculated Target Price: $15.14


Near-term EPS and price target sensitivity to improvement in Civil margins As discussed, we believe that much of the “heavy lifting” has been done with CAE’s restructuring and simulator redeployment initiatives efforts over the past 12–18 months. We expect this will translate into Civil (and particularly Civil Training and Services) operating margin improvement from recent period lows. We expect further margin expansion in F2H/14E, followed by greater improvement by mid-F2015E.

Exhibit 18: Aggregate Civil margins have been impacted by Oxford acquisition and ongoing restructuring

Exhibit 19: Civil Training and Services revenues and margins are seen rebounding after hitting FQ1/14 lows

-

50.0

100.0

150.0

200.0

250.0

300.0

350.0

400.0

Q1

/13

Q2

/13

Q3

/13

Q4

/13

Q1

/14

Q2

/14

Q3

/14

E

Q4

/14

E

Q1

/15

E

Q2

/15

E

Q3

/15

E

Q4

/15

E

10.0%

15.0%

20.0%

25.0%

Revenue ($MM) [LHS]EBIT (Adjusted for One Time Items) % [RHS]

-

50.0

100.0

150.0

200.0

250.0

Q1

/13

Q2

/13

Q3

/13

Q4

/13

Q1

/14

Q2

/14

Q3

/14

E

Q4

/14

E

Q1

/15

E

Q2

/15

E

Q3

/15

E

Q4

/15

E

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Revenue ($MM) [LHS]

EBIT (Adjusted for One Time Items) % [RHS]

Note 1: EBIT adjusted for one time non recurring gains, estimated FX gains and charges. Note 2: Financials presented herein include recent changes for IFRS 11, and IAS 19 (Amended).


Note: EBIT adjusted for one time non recurring gains, estimated FX gains and charges. Note 2: Financials presented herein include recent changes for IFRS 11, and IAS 19 (Amended).


We expect that the shares will react positively to growing evidence of operating margin improvement, and we recommend investors build positions ahead of that

CAE Inc.


However, our current estimates are still somewhat conservative relative to management expectation of “high teens” operating margins starting F2H/14E. Exhibit 20 illustrates the impact on F2015E EPS and price target in scenarios of any EBIT margin upside relative to our base estimate of 15.0% in F2014E and 17.7% in F2015E.

Exhibit 20: Exploring the impact of near-term margin improvement beyond our base forecast

Increment in Civil Margins (bps) Beyond Our Base Forecast

(50) 0 (Base) 50 100 150 200 250

Implied Civil EBIT % (F14E) 14.7% 15.0% 15.2% 15.5% 15.8% 16.0% 16.3%

Implied Civil EBIT % (F15E) 17.2% 17.7% 18.2% 18.7% 19.2% 19.7% 20.2%

Implied Civil EBITDA % (F14E) 23.9% 24.2% 24.5% 24.7% 25.0% 25.3% 25.5%

Implied Civil EBITDA % (F15E) 26.5% 27.0% 27.5% 28.0% 28.5% 29.0% 29.5%

EPS Increase (F14E) (0.01) 0.00 0.01 0.02 0.03 0.04 0.05

EPS Increase (F15E) (0.02) 0.00 0.02 0.04 0.06 0.08 0.10

Price Target Increase (0.25) 0.00 0.25 0.50 0.75 1.00 1.25

(Based on F15E)


Price target sensitivity to trading multiples Our base case assumes 15.0x P/E and 8.0x EV/EBITDA multiples. While this is in line with the current multiples of A&D peers, CAE has historically commanded a premium valuation. Should improved operating and financial performance boost investor sentiment, we may well see the shares trade 1–2 multiple points higher.

Plausible variances in trading multiples could result in a -$1 to +$3 change to our current $14 target.

Exhibit 21: Price target sensitivity to trading multiples

12.0x 13.0x 14.0x 15.0x 16.0x 17.0x 18.0x 19.0x

6.5x 11.00 12.00 12.00 13.00 13.00 14.00 14.00 14.00

7.0x 12.00 12.00 13.00 13.00 14.00 14.00 15.00 15.00

7.5x 12.00 13.00 13.00 14.00 14.00 15.00 15.00 15.00

8.0x 13.00 13.00 14.00 14.00 15.00 15.00 16.00 16.00

8.5x 13.00 14.00 14.00 15.00 15.00 16.00 16.00 17.00

9.0x 14.00 14.00 15.00 15.00 16.00 16.00 17.00 17.00

9.5x 14.00 15.00 15.00 16.00 16.00 17.00 17.00 18.00

10.0x 15.00 15.00 16.00 16.00 17.00 17.00 18.00 18.00

10.5x 16.00 16.00 16.00 17.00 17.00 18.00 18.00 19.00

EV/E

BIT

DA

P/E


Aerospace peer valuation would suggest a target of $13–17

CAE Inc.


Assessing five-year earnings scenarios Looking out over the next five years, we see continued earnings progression driven by a number of factors:

Higher efficiency (utilization rate and deployment of capital) across the training centres.

Modest growth in the number of FFS sales.

Stabilization, and then gradual growth, in the Military business (in particular in the outer years as the use of simulator-based training gains momentum because of its much lower cost profile).

Here, we review:

Our base long-term forecast for C2018E.

Perspectives on 3- to 4-year share price objectives, based on that five-year earnings outlook.

Earning and share price scenarios (five-year view) by varying several key parameters:

Civil Training and Services: The utilization rate for simulators and the total number of simulators deployed (Simulator Equivalents or RSEU).

Civil Products: The number of annual simulators sold (and their average price).

Military: Order flow in both Military products and Military training and services

Multiples: Varying target EV/EBITDA and P/E metrics.

Base long-term forecast suggests $20–22 share price in 3–4 years Looking out over the next approximately five years, our base forecast reflects CAE revenue CAGR of 5.5% to $2.8B, generating EPS of $1.31 (14.8% CAGR).

CAE Inc.


Exhibit 22: Base case long-term (C2018E) earnings forecast

INCOME STATEMENT ($MM)

CAE Inc. (Year End March 31) CAGR

C2013E C2018E C13E-C18E

Revenue Summary:

Civil Simulation Products Revenues 483 581 3.7%

Civil Training & Services Revenues 727 1,028 7.2%

Military Simulation Products Revenues 550 679 4.3%

Military Training & Services Revenues 266 320 3.8%

New Core Markets 117 200 11.3%

Revenues 2,143 2,807 5.5%

Total Operating Costs 1,688 2,099 4.5%

Total Depreciation & Amortization 163 219 6.1%

EBITDA 455 708 9.2%

Total EBITDA Margin % 21.2% 25.2%

EBIT 292 489 10.9%

Total EBIT Margin % 13.6% 17.4%

Adjusted Net Income 171 342 14.8%

Adj. Net Income Margin % 8.0% 12.2%

EPS (F.D) $0.67 $1.31

Adj. EPS (F.D) $0.66 $1.31 14.8%

Dividends Per Share $0.22 $0.24 1.8%

Wtd. Avg. Shares O/S (Basic) (in MMs) 261.0 261.0

Wtd. Avg. Shares O/S (FD) (in MMs) 261.5 261.5


Using current target multiples applied to our C2018E preliminary earnings forecast implies a 3- to 4-year share price objective of ~$21 (a 15–20% implied compounded annual return). Discounted back, this implies a one-year objective of ~$15, just above our current target.

Exhibit 23: Price target outlook (C2018E)

C2018E

ACTUAL PRICE TARGET Target based on P/E Target based on EV/EBITDA

Average Target Price $20.59 P/E Multiple: 15.0x EV/EBITDA Multiple: 8.0x

Actual Target Price: $21.00 C2018E EPS: $1.31 C2018E EBITDA ($MM): 707.9

Discounted Target 15.00 Calculated Target Price: $19.60 Calculated Target Price: $21.57


Again, varying target multiples yields plausible 3- to 4-year values of ~$18–24.

CAE Inc.


Exhibit 24: Long-term target price sensitivity to trading multiples

12.0x 13.0x 14.0x 15.0x 16.0x 17.0x 18.0x 19.0x

6.5x 17.00 17.00 18.00 19.00 19.00 20.00 21.00 21.00

7.0x 17.00 18.00 19.00 19.00 20.00 21.00 21.00 22.00

7.5x 18.00 19.00 19.00 20.00 21.00 21.00 22.00 23.00

8.0x 19.00 19.00 20.00 21.00 21.00 22.00 23.00 23.00

8.5x 19.00 20.00 21.00 21.00 22.00 23.00 23.00 24.00

9.0x 20.00 21.00 21.00 22.00 23.00 23.00 24.00 25.00

9.5x 21.00 21.00 22.00 23.00 23.00 24.00 25.00 25.00

10.0x 21.00 22.00 23.00 23.00 24.00 25.00 25.00 26.00

10.5x 22.00 23.00 23.00 24.00 25.00 25.00 26.00 27.00

P/E

EV/E

BIT

DA


Five-year earnings sensitivity to key operating parameters From our $21 base case long-term share price objective, we consider the expected earnings and share price impact of varying key operating parameters:

Exhibit 25: Summary of findings

Upside Downside Upside Downside

Base

Civil Training & Services $4.00 ($3.25) $0.29 ($0.25)

Civil Simulation Products $1.00 ($1.75) $0.08 ($0.14)

Military Products & Training Services $1.75 ($1.00) $0.13 ($0.08)

Price Target EPS

$21.00 $1.31


Civil Training and Services – EPS and price target sensitivity to varied utilization rates and simulator counts Historically, on an annual basis we have seen simulator utilization peak to ~82% and trough to ~64%. With the Oxford acquisition, CAE has been able to further widen its training network coverage and increase the total number of simulators deployed, although in the near term this has come at the expense of utilization rates and margins.

Keeping our base target at 72% utilization and 232 RSEUs, we have assessed sensitivity to the forecasted C2018E EPS and price target and seen a variance of -$0.25 to +$0.29 in C2018E EPS and -$3.25 to +$4.00 in price target for plausible scenarios.

Plausible scenarios add up to $6 to longer-term price objective

CAE Inc.


Exhibit 26: Change in EPS with no. and utilization of sims Exhibit 27: Change in price target with no. and utilization of sims

199 211 222 234 246 257 269 281

(15%) (10%) (5%) Base 5% 10% 15% 20%

64.0% (0.43)$ (0.40)$ (0.37)$ (0.33)$ (0.30)$ (0.27)$ (0.23)$ (0.20)$

66.0% (0.36)$ (0.32)$ (0.29)$ (0.25)$ (0.21)$ (0.17)$ (0.13)$ (0.10)$

68.0% (0.29)$ (0.25)$ (0.21)$ (0.16)$ (0.12)$ (0.08)$ (0.04)$ 0.00$

70.0% (0.22)$ (0.17)$ (0.13)$ (0.08)$ (0.03)$ 0.01$ 0.06$ 0.10$

72.0% (0.15)$ (0.10)$ (0.05)$ 0.00$ 0.05$ 0.10$ 0.15$ 0.21$

74.0% (0.08)$ (0.02)$ 0.03$ 0.09$ 0.14$ 0.19$ 0.25$ 0.31$

76.0% (0.01)$ 0.06$ 0.11$ 0.17$ 0.23$ 0.29$ 0.35$ 0.41$

78.0% 0.07$ 0.13$ 0.19$ 0.25$ 0.32$ 0.38$ 0.44$ 0.51$

80.0% 0.14$ 0.21$ 0.27$ 0.34$ 0.41$ 0.47$ 0.54$ 0.61$

Uti

liza

tio

n %

Average RSEUs

199 211 222 234 246 257 269 281

(15%) (10%) (5%) Base 5% 10% 15% 20%

64.0% (5.75)$ (5.25)$ (4.75)$ (4.25)$ (3.75)$ (3.25)$ (2.50)$ (2.00)$

66.0% (5.00)$ (4.25)$ (3.75)$ (3.25)$ (2.50)$ (2.00)$ (1.50)$ (0.75)$

68.0% (4.00)$ (3.25)$ (2.75)$ (2.00)$ (1.50)$ (0.75)$ (0.25)$ 0.50$

70.0% (3.00)$ (2.50)$ (1.75)$ (1.00)$ (0.25)$ 0.25$ 1.00$ 1.75$

72.0% (2.25)$ (1.50)$ (0.75)$ 0.00$ 0.75$ 1.50$ 2.25$ 3.00$

74.0% (1.25)$ (0.50)$ 0.25$ 1.00$ 2.00$ 2.75$ 3.50$ 4.25$

76.0% (0.50)$ 0.50$ 1.25$ 2.25$ 3.00$ 4.00$ 4.75$ 5.75$

78.0% 0.50$ 1.50$ 2.25$ 3.25$ 4.25$ 5.00$ 6.00$ 7.00$

80.0% 1.50$ 2.50$ 3.25$ 4.25$ 5.25$ 6.25$ 7.25$ 8.25$

Uti

liza

tio

n %

Average RSEUs

Source: RBC Capital Markets estimates Source: RBC Capital Markets estimates

Civil Simulator Products – EPS and price target sensitivity to simulator sales/ASPs Civil simulation products have seen an increasing order book given global commercial fleet expansions. Management expects to close F2014E with record-high sales of 40 FFS.

Looking five years out, our base case forecast reflects the sale of 43 FFS at an average price of $13.8MM/simulator. Sensitivity around these metrics could result in a variance of -$0.14 to +$0.08 in C2018E EPS and -$1.75 to +$1.00 in price target.

Exhibit 28: Change in C2018E EPS with simulator sales/ASPs Exhibit 29: Change in target price with simulator sales/ASPs

37 39 41 43 45 47 49 52

(15%) (10%) (5%) Base 5% 10% 15% 20%

8.0 ($0.21) ($0.20) ($0.19) ($0.18) ($0.17) ($0.15) ($0.14) ($0.12)

9.0 ($0.18) ($0.17) ($0.16) ($0.15) ($0.13) ($0.12) ($0.11) ($0.09)

10.0 ($0.16) ($0.14) ($0.13) ($0.11) ($0.10) ($0.09) ($0.07) ($0.05)

11.0 ($0.13) ($0.12) ($0.10) ($0.08) ($0.07) ($0.05) ($0.04) ($0.01)

12.0 ($0.10) ($0.09) ($0.07) ($0.05) ($0.03) ($0.02) $0.00 $0.03

13.0 ($0.08) ($0.06) ($0.04) ($0.02) ($0.00) $0.02 $0.04 $0.06

14.0 ($0.05) ($0.03) ($0.01) $0.01 $0.03 $0.05 $0.07 $0.10

15.0 ($0.02) ($0.00) $0.02 $0.04 $0.06 $0.08 $0.11 $0.14

16.0 $0.00 $0.03 $0.05 $0.07 $0.10 $0.12 $0.14 $0.18

# Sims Booked 6 months Prior

Ave

rage

Bo

oki

ng

Pe

r FF

S

37 39 41 43 45 47 49 52

(15%) (10%) (5%) Base 5% 10% 15% 20%

8.0 ($2.75) ($2.50) ($2.50) ($2.25) ($2.25) ($2.00) ($1.75) ($1.75)

9.0 ($2.50) ($2.25) ($2.00) ($2.00) ($1.75) ($1.50) ($1.50) ($1.25)

10.0 ($2.00) ($1.75) ($1.75) ($1.50) ($1.25) ($1.25) ($1.00) ($0.75)

11.0 ($1.75) ($1.50) ($1.25) ($1.00) ($1.00) ($0.75) ($0.50) ($0.25)

12.0 ($1.25) ($1.25) ($1.00) ($0.75) ($0.50) ($0.25) $0.00 $0.25

13.0 ($1.00) ($0.75) ($0.50) ($0.25) $0.00 $0.25 $0.50 $0.75

14.0 ($0.75) ($0.50) ($0.25) $0.00 $0.25 $0.50 $0.75 $1.25

15.0 ($0.25) $0.00 $0.25 $0.50 $0.75 $1.00 $1.25 $1.75

16.0 $0.00 $0.25 $0.50 $1.00 $1.25 $1.50 $1.75 $2.25

Ave

rage

Bo

oki

ng

Pe

r FF

S

# Sims Booked 6 months Prior


Military – EPS and PT sensitivity to varied training backlog & simulator bookings Prior-period simulator bookings and training services backlog translate into next-period revenue for the military business. Keeping in context the slowdown in the overall defence sector, our base case assumes ~$690MM bookings for Military products and ~$1.5B backlog in military training and services for C2017E. The sensitivity around these metrics could result in a variance of -$0.08 to +$0.13 in C2018E EPS and -$1.00 to +$1.75 in price target for the plausible scenarios.

CAE Inc.


Exhibit 30: Change in EPS with bookings and backlog Exhibit 31: Change in price target with bookings and backlog

C2017E Military SP Bookings C2017E Military SP Bookings

550 600 650 700 750 800 850 900

900 (0.19)$ (0.14)$ (0.10)$ (0.07)$ (0.04)$ (0.01)$ 0.02$ 0.05$

1,100 (0.16)$ (0.11)$ (0.07)$ (0.04)$ (0.01)$ 0.02$ 0.05$ 0.08$

1,300 (0.13)$ (0.08)$ (0.04)$ (0.01)$ 0.02$ 0.05$ 0.08$ 0.11$

1,500 (0.10)$ (0.05)$ (0.01)$ 0.02$ 0.05$ 0.08$ 0.11$ 0.14$

1,700 (0.08)$ (0.02)$ 0.01$ 0.04$ 0.07$ 0.10$ 0.13$ 0.17$

1,900 (0.05)$ 0.00$ 0.04$ 0.07$ 0.10$ 0.13$ 0.16$ 0.19$

2,100 (0.02)$ 0.03$ 0.07$ 0.10$ 0.12$ 0.16$ 0.19$ 0.22$

2,300 0.00$ 0.06$ 0.09$ 0.12$ 0.15$ 0.18$ 0.21$ 0.25$

2,500 0.03$ 0.08$ 0.12$ 0.15$ 0.18$ 0.21$ 0.24$ 0.27$

C2

01

7E

Mili

tary

T&

S B

ackl

og

C2017E Military SP Bookings

550 600 650 700 750 800 850 900

900 (2.50)$ (2.00)$ (1.25)$ (1.00)$ (0.50)$ (0.25)$ 0.25$ 0.75$

1,100 (2.25)$ (1.50)$ (1.00)$ (0.50)$ (0.25)$ 0.25$ 0.75$ 1.00$

1,300 (1.75)$ (1.00)$ (0.50)$ (0.25)$ 0.25$ 0.75$ 1.00$ 1.50$

1,500 (1.25)$ (0.75)$ (0.25)$ 0.25$ 0.75$ 1.00$ 1.50$ 2.00$

1,700 (1.00)$ (0.25)$ 0.25$ 0.50$ 1.00$ 1.50$ 1.75$ 2.25$

1,900 (0.50)$ 0.00$ 0.50$ 1.00$ 1.25$ 1.75$ 2.25$ 2.50$

2,100 (0.25)$ 0.50$ 1.00$ 1.25$ 1.75$ 2.25$ 2.50$ 3.00$

2,300 0.25$ 0.75$ 1.50$ 1.75$ 2.25$ 2.50$ 3.00$ 3.50$

2,500 0.50$ 1.25$ 1.75$ 2.25$ 2.50$ 3.00$ 3.50$ 3.75$

C2

01

7E

Mili

tary

T&

S B

ackl

og


CAE Inc.


Exhibit 32: CAE financial forecast summary

CAE Inc. (Year End March 31) Jun-12 Sep-12 Dec-12 Mar-13 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Mar-15 Mar-16 CAGR

Q1/13 Q2/13 Q3/13 Q4/13 F2013A Q1/14 Q2/14 Q3/14E Q4/14E F2014E Q1/15E Q2/15E Q3/15E Q4/15E F2015E F2016E F13-F16E

Revenue Summary:

Civil Simulation Products Revenues 80 99 93 130 402 124 103 127 137 491 132 127 132 135 527 511 8.3%

Civil Training & Services Revenues 171 189 194 202 756 178 166 181 192 718 198 194 207 213 812 897 5.9%

Military Simulation Products Revenues 135 131 141 155 562 138 124 133 149 544 129 131 140 145 545 547 (0.9%)

Military Training & Services Revenues 67 67 66 72 273 61 68 65 68 262 63 66 66 69 264 271 (0.3%)

New Core Markets 26 28 29 29 112 30 27 31 31 119 33 30 34 34 131 146 9.2%

Revenues 480 514 522 588 2,105 530 488 537 578 2,133 555 549 579 595 2,278 2,372 4.1%

EBITDA 112 115 116 129 472 103 106 118 129 455 125 127 138 145 534 580 7.1%

Total EBITDA Margin % 23.3% 22.4% 22.2% 22.0% 22.4% 19.3% 21.7% 21.9% 22.4% 21.3% 22.6% 23.1% 23.8% 24.3% 23.5% 24.5%

EBIT 77 77 76 85 315 63 65 79 86 293 83 82 95 98 358 391 7.6%

Total EBIT Margin % 16.0% 14.9% 14.5% 14.5% 14.9% 11.8% 13.4% 14.7% 14.9% 13.7% 14.9% 15.0% 16.4% 16.5% 15.7% 16.5%

Interest Expense (Income) 17 18 16 18 68 17 19 18 17 70 18 17 17 16 67 60

Other (Incl. Restructuring Charges) 32 10 13 14 69 - - - - -

EBT (Before Disc. Ops) 28 49 47 53 178 46 47 61 69 222 65 65 78 83 291 332

Total Income Tax 6 13 9 7 35 0 8 15 17 40 16 16 19 20 70 80

Net Income To Firm 22 37 38 46 142 45 38 46 52 182 50 49 59 63 221 252

Net Gain (Loss) from Discontinued Ops - - - - - - - - - - - - - - - -

Net Income to Equity Holders 21 37 38 44 139 46 38 46 52 182 49 49 59 63 220 251 21.7%

Net Income Margin % 4.4% 7.1% 7.2% 7.5% 6.6% 8.6% 7.9% 8.6% 9.0% 8.5% 8.9% 9.0% 10.2% 10.5% 9.7% 10.6%

Non-Operating Items - - - - - - - - - - - - - - - -

Tax impact on Unusual Items - (13) - (5) (18) (11) - - - (11) - - - - - -

Unusual items net of tax 32 10 10 10 62 3 - - - 3 - - - - - -

Adjusted Net Income 46 34 45 49 174 37 38 46 52 174 49 49 59 63 220 251 13.0%

Adj. Net Income Margin % 9.6% 6.6% 8.5% 8.4% 8.3% 7.1% 7.9% 8.6% 9.0% 8.2% 8.9% 9.0% 10.2% 10.5% 9.7% 10.6%

EPS (Basic) $0.08 $0.14 $0.15 $0.17 $0.54 $0.18 $0.15 $0.18 $0.20 $0.70 $0.19 $0.19 $0.23 $0.24 $0.84 $0.96

EPS (F.D) $0.08 $0.14 $0.15 $0.17 $0.54 $0.18 $0.15 $0.18 $0.20 $0.70 $0.19 $0.19 $0.23 $0.24 $0.84 $0.96

Adj. EPS (F.D) $0.18 $0.13 $0.17 $0.19 $0.67 $0.14 $0.15 $0.18 $0.20 $0.67 $0.19 $0.19 $0.23 $0.24 $0.84 $0.96 12.7%

Dividends Per Share $0.04 $0.05 $0.05 $0.05 $0.19 $0.05 $0.05 $0.06 $0.06 $0.22 $0.06 $0.06 $0.06 $0.06 $0.24 $0.24 8.1%

Wtd. Avg. Shares O/S (Basic) (in MMs) 258.4 258.7 259.2 259.7 259.0 260.2 261.0 261.0 261.0 261.0 261.0 261.0 261.0 261.0 261.0 261.0

Wtd. Avg. Shares O/S (FD) (in MMs) 258.6 259.0 259.5 260.5 259.4 260.2 261.5 261.5 261.5 261.5 261.5 261.5 261.5 261.5 261.5 261.5


CAE Inc.


ValuationOur 12-month price target is based on a blend of P/E, EV/EBITDA, and DCF metrics, applied toour estimates on a rolling two-year forward basis. We apply multiples of 8x EV/EBITDA, and15.0x P/E to our estimates, in line with A&D peers with similar commercial/military exposureand historical averages that over the past five years have been 8.1x forward EV/EBITDA and16.2x forward P/E vs. the industry, which averaged 7.5x and 13.5x, respectively.

Price target impedimentsFactors that could limit CAE's ability to reach our price target include:

• Global military expenditures, particularly US expenditures, decline significantly more thanexpected, overly impacting simulator/training demand.

• Competitive pressures from new upstarts and integrated aerospace/defense companiescould impact revenues and margin, particularly in the event of an economic downturn.

• Potential for another financial crisis to freeze credit lines and place airplane purchases onhold.

• Political review process for simulator equipment sales/training services and contracts couldbe extended.

• FX fluctuations, particularly with a strengthening C$, could negatively impact financialresults.

Company descriptionCAE Inc. is a leader in simulation technology and integrated training solutions for the civilaviation industry and global defence forces. The company has the world’s largest installed baseof civil and military full-flight simulators and training devices. Over the past 10 years, CAE hasdiversified into the less cyclical pilot training business, and now offers training services throughthe a global network of civil aviation and military training centres.

CAE Inc.


Required disclosures

Non-U.S. analyst disclosureRitika Goel and Anthony Jin (i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may not beassociated persons of the RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule 472restrictions on communications with a subject company, public appearances and trading securities held by a research analystaccount.

Conflicts disclosuresThe analyst(s) responsible for preparing this research report received compensation that is based upon various factors, includingtotal revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generatedby investment banking activities of the member companies of RBC Capital Markets and its affiliates.

Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in,this report. To access current conflicts disclosures, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1 or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza,29th Floor, South Tower, Toronto, Ontario M5J 2W7.

A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services fromCAE Inc. in the past 12 months.

RBC Capital Markets, LLC makes a market in the securities of CAE Inc..

RBC Dominion Securities Inc. makes a market in the securities of CAE Inc..

A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other thaninvestment banking services from CAE Inc. during the past 12 months. During this time, a member company of RBC Capital Marketsor one of its affiliates provided non-securities services to CAE Inc..

RBC Capital Markets is currently providing CAE Inc. with non-securities services.

RBC Capital Markets has provided CAE Inc. with investment banking services in the past 12 months.

RBC Capital Markets has provided CAE Inc. with non-securities services in the past 12 months.

Michael Fortier, Vice Chairman of RBC Capital Markets, is a member of the Board of Directors of CAE Inc..

The author is employed by RBC Dominion Securities Inc., a securities broker-dealer with principal offices located in Toronto,Canada.

An analyst involved in the preparation of this report has visited certain material operations of CAE Inc..

Explanation of RBC Capital Markets Equity rating systemAn analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assignedto a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative tothe analyst's sector average. Although RBC Capital Markets' ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP), andUnderperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same becauseour ratings are determined on a relative basis.RatingsTop Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 monthswith a favorable risk-reward ratio.Outperform (O): Expected to materially outperform sector average over 12 months.Sector Perform (SP): Returns expected to be in line with sector average over 12 months.Underperform (U): Returns expected to be materially below sector average over 12 months.Risk Rating

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As of March 31, 2013, RBC Capital Markets suspends its Average and Above Average risk ratings. The Speculative risk rating reflectsa security's lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limitedoperating history that result in a higher expectation of financial and/or stock price volatility.

Distribution of ratingsFor the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,the meanings are not the same because our ratings are determined on a relative basis (as described below).

Distribution of ratings

RBC Capital Markets, Equity Research

As of 30-Sep-2013

Investment Banking

Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [Top Pick & Outperform] 769 51.00 271 35.24

HOLD [Sector Perform] 656 43.50 179 27.29

SELL [Underperform] 83 5.50 13 15.66

References to a Recommended List in the recommendation history chart may include one or more recommended lists or modelportfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists includea former list called the Prime Opportunity List (RL 3), the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Large Cap(RL 7), the Guided Portfolio: Dividend Growth (RL 8), the Guided Portfolio: Midcap 111 (RL 9), the Guided Portfolio: ADR (RL 10),and the Guided Portfolio: Global Equity (U.S.) (RL 11). RBC Capital Markets recommended lists include the Strategy Focus Listand the Fundamental Equity Weightings (FEW) portfolios. The abbreviation 'RL On' means the date a security was placed on aRecommended List. The abbreviation 'RL Off' means the date a security was removed from a Recommended List.

Equity valuation and risksFor valuation methods used to determine, and risks that may impede achievement of, price targets for covered companies, pleasesee the most recent company-specific research report at https://www.rbcinsight.com or send a request to RBC Capital MarketsResearch Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.

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Conflicts policyRBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.To access our current policy, clients should refer tohttps://www.rbccm.com/global/file-414164.pdfor send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, SouthTower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.

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Analyst certificationAll of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all ofthe subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly orindirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.

The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s Financial ServicesLLC (“S&P”) and is licensed for use by RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or impliedwarranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warrantiesof originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing,in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special,punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Disclaimer

RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBCCapital Markets, LLC, RBC Europe Limited, RBC Capital Markets (Hong Kong) Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada, SydneyBranch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty,express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. Allopinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice andare provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investmentadvice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives ofpersons who receive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independentinvestment advisor if you are in doubt about the suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buyany securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC CapitalMarkets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment bankingrevenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and otherinvestment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in this report may not beeligible for sale in some jurisdictions. RBC Capital Markets may be restricted from publishing research reports, from time to time, due to regulatory restrictions and/or internal compliance policies. If this is the case, the latest published research reports available to clients may not reflect recent material changes in the applicableindustry and/or applicable subject companies. RBC Capital Markets research reports are current only as of the date set forth on the research reports. This report is

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Documents

CAE Initiating Coverage -- RBC