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Calian Group: Stability Through Diversity

In light of the new investor landscape which has been influenced by rising rates and inflation hitting near 40 year highs, investor preferences have markedly shifted from just 6 months ago when yields on the 10-year treasury were below 2.0% and the risk-on/growth trade was in full force. Note that YTD, the S&P has lost -16.5%, the NASDAQ dropped -26.9% while the TSX dropped -4.0%. Investor preferences now prioritize consistent growth with an established history of stable FCF generation and profitability. Given that premise, we find that the time is right to finally highlight one of our longest individual holdings (since 2006) which has to date grown to be one of our largest individual holdings – Calian Group (CGY) which happens to be bucking the trend and is up +11.2% YTD. Despite being public since 1993, this Ottawa-based, under the radar conglomerate is often missed or simply misunderstood given its four very distinct business segments. The Calian story is one of stable cash flow generation which deserves two distinct timestamps, the pre-Kevin Ford CEO era and the post era, following his appointment as CEO in April 2015.

Calian was always a consistently profitable company (this past fiscal Q2/2022 for the three month period ended on March 31, 2022, represented the 81st consecutive quarter of profitability) and was initially anchored by the Advanced Technologies Segment (focusing on communication solutions for satellite networks) along with an IT Segment. With consistent cashflows, the company was predominantly known as a high dividend yielding company with slow growth but consistent profits from a predominantly Canadian client base. The company embarked on a new trajectory post April 2015 once current CEO Kevin Ford was appointed. Since his appointment, the company has shifted to become a growth company with four distinct business segments, each catering to a global customer base. The shift to expansion has been executed extremely well as the company’s value has tripled since 2015. In just the last four years, FY/2021 revenues have doubled, EBITDA grew by 140% (going from $25M to $60M) while gross margins have increased by 500bps (going from 21% to 26%). The gross margin expansion is most telling seeing as in that very same timeframe, 10 acquisitions were announced with nearly $250M deployed (management stated that their disciplined acquisition approach is usually at an EBITDA multiple limit of approximately 5x). On top of this all, the recent fiscal Q2/2022 financial results demonstrated further momentum with record 28% gross margins, 11.8% adjusted EBITDA margins, solid adjusted earnings of $1.17/share and consolidated revenues on pace to surpass $600M (FY) for the first time. As such, guidance for FY/2022 revenues (midpoint of $603M), adjusted EBITDA (midpoint of $63M) and adjusted net profits (midpoint of $43M) were all increased compared to guidance as announced post year-end 2021 financial results.

The diversified business offerings (now expanded to four distinct segments) have played a large part in transforming the company and growing its revenues. As can be seen above, the individual business segments contribute roughly an equal proportion to total revenues.

The segments are as follows:

Advanced Technologies Segment: Calian is the world’s predominant supplier of advanced software systems for managing and operating next generation satellite communication networks. Solutions offer connectivity for safety services to inflight connectivity and military communications. This segment provides innovative software solutions to manage and control satellite networks, allowing service providers to control both the satellite and the ground network, in real time. This division is also the largest manufacturer of antennas (Calian antennas happen to be the most accurate on the market) and amplifiers for global navigation satellite systems (GNSS) used for global positioning applications, but also needed for electrical grid, internet, cellular and even stock market transactions. The current deployment of 5G networks is providing significant demand for advanced antennas. The antenna division has been growing at a 30%+ clip since the last few years and is also seeing growing demand for precision timing systems in the EV and UAV market. Among others, contracts have been signed with Inmarsat and SiriusXM. $38M in new contract signings was announced in Q2 with current backlog amounting to $130M.

Learning/Training Segment: This segment services Synthetic Training Environments (STE) which encompasses numerous current military contracts for training and simulation exercises. These exercises mix live, virtual gaming and constructive environments in order to prepare soldiers (current contracts with DND and NATO) for operational readiness on land, sea or in the air. The learning/training environment has been the largest growing segment for what is called immersive training, even exceeding that of gaming. Calian also provides online training modules for clients such as Hydro Ottawa and from the private sector, with offerings ranging form digital learning solutions to emergency management. A total of $34M in new contract signings was announced in Q2 with segment backlog amounting $275M

IT/Cyber Security: Calian is leveraging its health care and government verticals while also expanding in other areas within the IT and Cyber realm. With the recent acquisition of Computex ($43M), Calian has a beachhead into the massive US market. Product offerings include on-demand resourcing, consulting services, enterprise cloud solutions and SaaS platforms (specifically the Juno 360 cybersecurity suite). Calian has a 20+ year relationship with Microsoft, much of their offerings available on Azure. This segment had a particularly strong Q2 with $62M in new contract signings and $112M in current backlog.

Digital Health Solutions: Calian has the largest and most diversified network of healthcare providers in Canada. The company offers disruptive solutions offered in virtual care, telehealth, mental health patient support and even homecare. With $26M in new contract signings during Q2, backlog from this segment is the highest, totaling $763M.

Ultimately, the company has an established track record of profitability along with an even more recent history of accretive acquisitions. With a current backlog totaling $1.3B, and net liquidity of $114M (of which net cash amounts to $34M), the company is well placed for another big year on the m&a front. The longer term goal is to achieve $1.0B+ of revenues, which should be surpassed in the next few years. Note that 22% of revenues are now international, with 78% still coming from Canada. Though we acknowledge that the company is still very much under the radar given a mcap of $750M, investors have been slowly taking notice, as have the Canadian investment banks. Four years ago there were no more than three banks or broker/dealers following the stock, at present, that number has increased to eight. This is the type of stock you buy, and then you simply hold. No selling, no trading. Not a bad concept for a change. The company results and track record speak for themselves.


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