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Company Description

Magellan Aerospace, founded in 1994 and headquartered in Mississauga, ON, Is a diversified and global
supplier of aerospace components to the markets in Canada, United States and Europe. The company
designs, engineers and manufactures aerostructure and aero engine parts to both the commercial and
defense segments of the market. Within the commercial sector, it supplies parts to the large commercial
and business jet, regional aircraft, and helicopter markets.
Investment Thesis
Magellan has seen a decline in its stock price beginning this year due to headwinds such as vertical
integration in the industry causing downward pricing pressure. Moreover, the increase in defense
spending expands Magellan’s end markets and as a result should offset the pricing pressures taking
place in the industry. Based on the intrinsic valuation calculated by the DCF of $22.53 per share,
investors have a potential upside of 21% to gain based on todays share price.
Investment Attributes
 Long Term Contracts: Magellan has a strong track record of securing long term contracts to supply
to the industry’s major players such as Boeing, Airbus and Lockheed Martin. Most recently, the
company was awarded a 6 year contract to supply aluminium castings worth up to $81 million to
Pratt and Whitney.
 Strong Operating Metrics and Balance Sheet: The company boasts a ROE of 16% compared
industry average of 12.3% and ROA of 11.3% compared to the industry average of 6.1%. These
operating efficiencies have enabled the company to grow its share price at a CAGR of 33% over the
last 5 years.
 Dividend Growth: Magellan has grown its dividend year over year for the past 5 years in a row with
a CAGR of over 17% over the last 4 years. The company currently has a dividend yield of 1.82% and
has a payout ratio of 20%. The relatively low payout ratio along with the company’s strong and
increasing cash flow from operations and free cash flow tend to suggest that the company will be
able to maintain and increase this dividend going forward.
 Increase in Defense Spending: The outlook on defense spending in both the US and Canada is
expected to increase in the future given the current geopolitical climate. Moreover, Canada is also
expected to increase defense spending throughout the next decade.
Valuation
The company was valued using two approaches, using the DCF and relative valuation methods. Using
the DCF method, produced an intrinsic share price of $22.53 was calculated providing an upside
potential of 21% relative to the current market price. The DCF used a small cap premium in calculating
the cost of equity to reflect the nature of the company. The model as well as sensitivities are shown in
the exhibit 1 and 2. Magellan is currently trading at a P/E of 10.43X and an EV/EBITDA of 6.19. These
ratios are at a significant discount to their industry peers who’s average P/E and EV/EBITDA multiples
are 16.5X and 10.4X respectively.

Risks
 Majority Shareholder: The company has a major shareholder, Murray Edwards who owns about
76% of the company’s shares. This could be one explanation as to why the company is trading at
discount compared to its peers.
 Currency Risk: The company obtains its revenue almost evenly from European, Canadian and
United States. Fluctuations in the USD and EUR can have adverse effects on the company’s
operations and financial statements going forward. Magellan currently hedges a portion of its
foreign currency exposure to offset this threat.
Figure 1: DCF Valuation: FCFF Model ($CAD Millions)

2019 2020 2021 2022 2023 Terminal


EBIT * (1-t) $ 96.24 $ 100.33 $ 99.04 $ 93.18 $ 95.98
Depreciation $ 32.00 $ 32.00 $ 32.00 $ 32.00 $ 32.00
Change in NWC $ 10.99 $ 10.38 $ 9.64 $ 8.78 $ 7.78
Capex $ 32.00 $ 32.00 $ 32.00 $ 32.00 $ 32.00
FCFF $ 85.25 $ 89.95 $ 89.39 $ 84.41 $ 88.19 $ 1,549.89
PV FCFF $ 78.70 $ 76.64 $ 70.31 $ 61.28 $ 59.11 $ 1,038.74
Total EV $ 1,384.78
Net Debt $ 71.20
FCFE $ 1,313.58
# shares (Millions) 58.3
Per share Price $ 22.53
Current Share price $ 18.59
Upside potnential 21%

Figure 2: Sensitivity Analysis


Cost of Equity
$ 22.53 7.5% 8.0% 8.5% 9.0% 9.5%
Terminal Growth Rate

1.50% $ 24.96 $22.98 $21.28 $ 19.80 $ 18.51


1.75% $ 25.97 $23.82 $21.99 $ 20.42 $ 19.04
2.00% $ 27.08 $24.75 $22.77 $ 21.08 $ 19.61
2.25% $ 28.31 $25.76 $23.62 $ 21.79 $ 20.22
2.50% $ 29.68 $26.87 $24.54 $ 22.57 $ 20.88
2.75% $ 31.20 $28.11 $25.55 $ 23.41 $ 21.59
3.00% $ 32.92 $29.48 $26.67 $ 24.34 $ 22.37
3.25% $ 34.88 $31.02 $27.91 $ 25.36 $ 23.22