Canada is preparing to spend more on defence than it has in generations. Yet the opportunity for investors goes well beyond counting fighter jets and submarines.
Ottawa increasingly wants that money building Canadian companies.
Source: Getty Images
Here at home
At the Canada Investment Summit, Prime Minister Mark Carney said the country was undertaking its biggest increase in defence spending since the Second World War. His government expects the Defence Industrial Strategy to help catalyze roughly $500 billion in investment over the next decade.
The summit’s defence executives suggested the opportunity could stretch far beyond Canada. CAE Chief Executive Officer Matthew Bromberg described global demand as a “once-in-a-generation increase in defence spending.”
His explanation for Canada’s potential advantage was even simpler.
“Trust and technology is what Canada brings to the future of defence.”
That points investors toward companies already supplying the communications, training, and manufacturing capabilities allied governments increasingly need.
TSAT
Telesat (TSX: TSAT) may have one of the clearest new defence catalysts. The satellite company recently secured an initial $2.3 billion contract from Canada’s Defence Investment Agency to provide secure Arctic communications through its Lightspeed low-Earth-orbit network.
Including options, the contract could reach $2.7 billion. The deal expands Lightspeed from 156 satellites to 225 and should provide secure communications for Canadian Armed Forces operations across the Arctic.
Telesat shares recently traded around $69, and the risk is substantial. Second-quarter revenue fell 25% to $79 million as its older satellite business declined, while the company is spending heavily building Lightspeed and refinancing debt.
This is easily the most speculative pick. Yet successful Lightspeed deployment could transform Telesat from a declining legacy satellite operator into critical defence infrastructure.
CGY
Calian Group (TSX: CGY) offers a much cleaner financial picture. Calian provides military training, cybersecurity, communications, and other mission-critical services.
Third-quarter revenue jumped 20% to $230 million, while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) climbed 35% to $25.6 million. More importantly, backlog reached $1.4 billion. Roughly $1 billion of that is tied to defence.
Calian also recently secured a 15-year British Army training agreement worth $296 million. That’s exactly the opportunity summit executives were describing. Canadian defence expertise being sold to allied countries.
At around $81, Calian trades at roughly 18 times forward earnings. The shares have already rallied substantially, and government contracts can be uneven. Still, Calian combines defence growth with an earnings valuation I find considerably easier to swallow than many hotter defence names.
MAL
Finally, there’s Magellan Aerospace (TSX: MAL). Magellan manufactures components and systems for commercial aviation and defence. About 34% of first-half revenue came from defence markets. The company has also been moving deeper into the Canadian defence buildout.
Ottawa awarded Magellan a contract to develop domestic production of the M-72 light anti-tank weapon. Magellan also partnered with TKMS around potential Canadian submarine work and GE Aerospace around fighter-engine support. That’s the industrial strategy in miniature. Build Canadian production capability first, then pursue additional domestic and export work.
Second-quarter revenue reached roughly $306 million, while EBITDA climbed to about $43 million. At around $34, Magellan trades near 22 times forward earnings. The stock has more than doubled over the last year, so investors are no longer discovering it early. Yet if Canada succeeds in shifting more defence manufacturing onto Canadian factory floors, Magellan has plenty of ways to participate.
Bottom line
Canada’s defence opportunity isn’t simply about which company builds the next aircraft. Telesat provides secure communications. Calian trains military personnel and supplies mission-critical services. Magellan builds the hardware.
If global defence spending really is entering a once-in-a-generation cycle, Canada’s opportunity could extend from orbit all the way down to the factory floor.
