Airline parts manufacturer lands on European soil

Desjardins Capital Markets analyst Benoit Poirier upgrades his recommendation for Canadian manufacturing stock Héroux-Devtek to a ‘buy’ after acquiring a leading European manufacturer earlier this year.

Airline_Manufacturing_StockHéroux-Devtek Inc. (TSX—HRX) announced the acquisition of Compañía Española de Sistemas Aeronáuticos (CESA), a leading European provider of mechanical and electromechanical systems in the aerospace industry.

Desjardins Capital Markets analyst Benoit Poirier says the acquisition provides HRX an excellent platform to grow with aircraft manufacturers, Airbus SE, as well as expand its exposure to proprietary products and to the aftermarket segment. As a result, the analyst raises his target share price to $18 and upgrades his recommendation for the Canadian manufacturing stock to ‘buy’.

Overall, Mr. Poirier feels the transaction will bring together the expertise of two complementary engineering firms, which has the potential to create significant cross-selling opportunities.
He says HRX should benefit and leverage CESA’s strong engineering capabilities to stimulate productivity enhancement and product innovation across both platforms while expanding its footprint in Europe with two production facilities in Spain.

Strategic fit with Airbus

“This acquisition should strengthen HRX’s reputation as a key supplier,” says Mr. Poirier. “CESA represents an excellent strategic fit for HRX given its strong exposure to Airbus (roughly 50 per cent of revenue), which should allow the company to expand its exposure to proprietary products and the aftermarket segment, which provides recurring revenue over a long-term period.”

The analyst adds that the transaction is accretive. “Bottom line, we derive earnings per share accretion of $0.06 in fiscal 2019 and $0.09 in fiscal 2020,” he says. “We expect HRX’s pro forma net debt to adjusted earnings before interest, tax, depreciation and amortization (EBITDA) to stand at 2.4 (excluding government loans) and decline to a multiple of 1.8 one year after the closing.

Mr. Poirier derives a contribution of $16.5 million to his EBITDA forecast in fiscal year 2019 and $18.1 million in fiscal 2020. He says this reflects modest synergies and margin expansion opportunities at CESA. With enough flexibility on the balance sheet, management does not expect to fund the transaction through an equity financing.

Héroux-Devtek is an international company specializing in the design, development, manufacture and repair and overhaul of landing gear and actuation systems and components for the aerospace market.

This is an edited version of an article that was originally published for subscribers in the November 3, 2017, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

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