Clarus research on Top Aces acquisition
9 July 2007
Here is summary of a research report from Clarus Securities, as they reintroduce a target price and recommendation on Discovery Air (DA.A:TSX) following the announcement of its acquisition of Wellington Financial Fund II portfolio co. Top Aces. Inc.
“Discovery recently announced that it has entered into a ~$65 million [now worth $71 million with the appreciation of Discovery's share following the announcement] purchase agreement with Montreal-based Top Aces Inc. for cash and shares. Expected to close in Aug-07, the acquisition will be funded with ~$35 million in debt and the issuance of 20 million Discovery Air shares to Top Aces shareholders. Top Aces, an exclusive provider of fighter plane training services to the Canadian Dept. of National Defence (DND), provides a new platform with a counter-seasonal revenue stream compared to Discovery’s traditional businesses.
Due to the sensitive nature of Top Aces’ DND contracts, financial details were not disclosed. However, we believe that Top Aces’ revenue is ~$28-$32 million with EBITDA margins in-line with existing platforms (25-35%). When taking into account excess capacity and potential synergies between Top Aces and other Discovery subsidiaries, we believe the Company paid 6.6x fwd EBITDA, which is in line with multiples paid for previous acquisitions.
The addition marks Discovery’s entrance into the niche $1.5 billion defence flight training market. We believe further upside can be achieved by penetrating the growing outsourced armed forces training market across non-USA, NATO countries. While we are encouraged by Discovery’s entrance into niche markets, this acquisition has come earlier than anticipated as we had originally modeled one into our FY10 estimates. Our revenue and EBITDA estimates have increased however, as a result of the share issuance, our EPS estimates are now slightly lower.
We continue to believe that Discovery’s market-leading position in the Canadian North will result in continued pricing power, organic and external volume growth and ultimately higher margins for the Company in years to come. The addition of Top Aces helps diversify Discovery’s natural resource risk and exposes the Company to the growing niche market of defence flight training that is estimated to be worth $1.5 billion.
After further review of the acquisition, we reinstate our BUY recommendation and 12-month target price of $2.30 per share.”
AO
(disclosure – Mark McQueen is a director of Top Aces)
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