Canada might be looking at Toronto in the rearview, but Montreal is now dead ahead.
Apparently, the Canadian city belongs in the same aerospace conversation as Seattle and Toulouse. Which may help explain why the EU-Canada Summit looks as though it will take place in Montreal at the end of October.
That was one of the more striking messages from the Canada Investment Summit, where defence and advanced manufacturing received their own main-stage discussion. CAE Chief Executive Officer Matthew Bromberg described Montreal as the world’s “third most significant aerospace hub.”
The timing couldn’t be better. Bromberg called what’s happening in global defence a “once-in-a-generation increase in defence spending.” Allied countries need aircraft, communications systems, satellites, and the technology buried inside all of them.
“Trust and technology is what Canada brings to the future of defence,” Bromberg said.
For investors, that opportunity stretches well beyond the obvious aerospace names.
Source: Getty Images
TSAT
Telesat (TSX: TSAT) is my highest-risk pick. Its Lightspeed low-Earth-orbit satellite network is being built for commercial customers, governments, and increasingly defence.
That defence opportunity suddenly became very real. Telesat recently secured a $2.3 billion contract with Canada’s Defence Investment Agency to provide secure Arctic satellite communications to the Canadian Armed Forces. Including options, the deal could reach $2.7 billion. The contract also expands Lightspeed from 156 satellites to 225.
That lines up almost perfectly with what Telesat Chief Executive Officer Daniel Goldberg said at the summit about secure satellite communications becoming strategically important to Canada and its allies. The catch is today’s business.
Second-quarter revenue fell 25% to $79 million while adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) dropped to $22 million as the older satellite business shrank and Lightspeed absorbed heavy investment.
Shares recently traded around $69, so this is not the steady aerospace pick. It’s the bet that tomorrow’s satellite network becomes much more valuable than yesterday’s business.
MAL
Magellan Aerospace (TSX: MAL) is the more traditional manufacturing play. The company builds aeroengine components, aerostructures and defence products for aircraft manufacturers and governments around the world. That’s exactly the capability summit speakers argued Canada should expand.
Magellan has already secured a Canadian government contract to develop domestic production of the M-72 light anti-tank weapon. It also signed agreements involving potential fighter-engine sustainment and submarine-related defence work.
The financial momentum is encouraging. Second-quarter revenue jumped 22% to $306 million, while net income climbed to $19.8 million from just $5.4 million a year earlier. At around $34 per share, Magellan trades near 22 times forward earnings.
The shares have already rallied sharply, and aerospace programs can be slow and expensive. Still, if Ottawa wants more defence production staying inside Canada, Magellan already owns the factories.
FTG
My smaller-cap pick is Firan Technology Group (TSX: FTG). FTG makes electronic products and subsystems used in aerospace and defence, including cockpit equipment and specialized circuit boards. In other words, it sells the less glamorous pieces aircraft still can’t fly without.
Second-quarter bookings surged 89% year over year to $86.7 million, while backlog reached $193.5 million. Aerospace revenue itself increased 21%. FTG finished the quarter with net debt of just $2.9 million, leaving the balance sheet in good shape as demand grows.
Shares recently traded around $21, or roughly 25 times forward earnings. That’s not especially cheap for a small manufacturer, and the business depends heavily on aerospace production schedules. Yet record bookings suggest customers are already placing orders before the broader defence cycle fully plays out.
Bottom line
Canada’s aerospace opportunity isn’t simply about who builds the next jet. Telesat provides communications from orbit. Magellan manufactures critical hardware. FTG supplies the electronics buried inside aircraft and defence systems.
If Bromberg is right about a once-in-a-generation spending cycle, some of the most interesting winners may be the companies supplying everything behind the headline aircraft.
