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EQUITY RESEARCH

RBC Dominion Securities Inc. Steve Arthur, CFA (Analyst) (416) 842-7844 steve.arthur@rbccm.com Ritika Goel (Associate) (416) 842-7546 ritika.goel@rbccm.com

Anthony Jin, CFA, P.Eng.


(Associate Analyst) (416) 842-5338 anthony.jin@rbccm.com

December 4, 2013

CAE Inc.

Outperform
TSX: CAE; CAD 11.89; NYSE: CAE Price Target CAD 14.00
WHAT'S INSIDE Rating/Risk Change In-Depth Report Preview Price Target Change Est. Change News Analysis

Taking Flight - Part 1: Assessing long-term earnings scenarios


Our view: We see CAE as a business to own, and one now trading at attractive valuation levels. Near-term, we expect solid margin improvement following recent restructuring efforts, and we expect the shares to react positively to growing evidence of these margin gains. We assess long-term earnings scenarios and see plausible operating metrics yielding $1824 share prices over the next 34 years.

Scenario Analysis*
Downside Scenario 10.00 14%
*Implied Total Returns

Current Price 11.89

Price Target 14.00 20%

Upside Scenario 16.00 37%

Key points:
Examining key business drivers earnings and share price impact of various scenarios: We review the market position and drivers for CAEs business units and assess the earnings sensitivity to key assumptions: 1) Civil margins; 2) higher efficiency of Civil training centres; 3) growth in Civil FFS sales; and 4) stabilization (then gradual growth) in the military business; and 5) varied trading multiples. Near-term margin improvement (i.e., reaching the "high teens" in Civil) could add another $1 to share price target: We believe that much of the restructuring and simulator relocation work has been completed and should translate to sustained Civil operating margin improvement (particularly Civil Training & Services). Our current forecast reflects improvement, although it is conservatively below managements expectation of "high teens" Civil margins starting F2H/14E. Using their expectations, we see an incremental $0.040.08 in F2015E EPS, or ~ $0.501.00 to the price objective. Five-year earnings outlook points to $2022 share price (1520% annual returns); various operating scenarios point to $1824 range: A medium-term (five-year) outlook to C2018E yields a 5.5% revenue C13EC18E CAGR, driving EPS CAGR of 14.8%. Applying current multiples suggests a 3- to 4-year target of $2022 on C2018E EPS of ~ $1.30. We assess the sensitivity to these estimates by varying: Operating parameters: Civil Training & Service: varying utilization rate and deployment of simulators is the greatest driver of earnings variation. Plausible situations suggest a -$0.25 to +$0.29 variance in EPS, or -$3.25 to +$4.00 variance in share price. Civil Simulation Products (simulator sales and ASPs): -$1.75 to + $1.00 variance in share price Military (training backlog and simulator bookings): -$1.00 to + $1.75 variance in share price. Trading multiples, which yields plausible 3- to 4-yr values of ~$1824 Strong business, solid growth outlook, attractive valuation: We see CAE as a business to own, and at current levels valuation appears attractive. CAE now trades at a material discount to A&D peers (12.7x P/E and 6.6x EV/EBITDA C2015E versus A&D peer averages of 14.2x and 8.9x, respectively). We expect this gap to narrow with growing evidence of operating margin improvement over the next several quarters, and we recommend investors build positions ahead of that.

Key Statistics
Shares O/S (MM): Dividend: Float (MM): Debt to Cap: 261.5 0.24 253.6 47% Market Cap (MM): Yield: Enterprise Val. (MM): Avg. Daily Volume (MM): 3,109 2.0% 3,759 0.68

RBC Estimates
FY Mar Revenue Prev. EBITDA Prev. EV/EBITDA Prev. EPS, Adj Diluted Prev. P/AEPS Revenue 2013 2014 Prev. 2015 Prev. EBITDA 2013 2014 Prev. 2015 Prev. 2013A 2,104.5 471.9 8.0x 0.67 17.7x Q1 480.1A 530.4A 554.8E 539.7E 112.0A 102.5A 125.2E 121.7E 2014E 2,132.6 2,166.4 454.9 458.2 8.3x 8.2x 0.67 17.7x Q2 514.4A 487.5A 548.6E 541.4E 115.1A 105.7A 126.8E 124.6E 2015E 2,277.6 2,253.0 534.5 530.0 7.0x 7.1x 0.84 0.83 14.2x Q3 522.1A 537.0E 550.6E 579.0E 570.6E 115.7A 117.6E 118.2E 137.9E 136.7E 2016E 2,371.9 2,299.3 580.4 571.6 6.5x 6.6x 0.96 0.93 12.4x Q4 587.9A 577.7E 597.9E 595.1E 601.3E 129.1A 129.2E 131.8E 144.6E 147.0E

Revenue: Financial results were restated in FQ1/14 reflecting changes in reporting due to the adoption of IFRS 11 and the amended IAS 19. All values in CAD unless otherwise noted.

Priced as of prior trading day's market close, EST (unless otherwise noted).

For Required Non-U.S. Analyst and Conflicts Disclosures, see page 21.

CAE Inc.

Target/Upside/Downside Scenarios
Exhibit 1: CAE Inc.
20.00

Investment summary
CAE is a very strong business, a global leader in simulationbased technology and training services. Over the past year, CAE has been actively addressing end-market realities: military delays, softness in European demand, and integration of Oxford Aviation.
10.00

16.00

Share Price (CAD/sh)

15.00

14.00 11.89

10.00

5.00

After several quarters of restructuring and relocating simulators, we believe that much of that work is now complete, and we should see these redeployed simulators (~20 full flight simulators) begin contributing materially to revenue and margins in F2H/14E. We expect the shares to react positively on growing evidence of margin improvement and recomend that investors build positions ahead of that at currently attractive valuation levels. Furthermore, we see positive secular growth drivers in CAE's Civil business (both flight simulator equipment and training services) and expect outperformance over the longer term, driven by growing aircraft deliveries and pilot shortages, particularly in Asian and Emerging Markets. We expect this should more than offset expected declines in Military.

0.00

Current Share Price

Price Target

Upside Scenario

Downside Scenario

Source: RBC Capital Markets estimates

Target price/ base case Our base case reflects a 6% revenue CAGR (F2013F2016E) for Civil driven by robust long-term fundamentals, offset by 3% expected annual declines in Military through F2016E. We expect New Core Markets to grow at a fairly robust pace of ~13% y/y through F2015E. Our forecasts incorporate: 1) recovery of Civil operating margins to ~18%; 2) Military operating margins of 1314%; and 3) NCM operating margins of ~610%. We value CAE based on an average of our DCF model, 15.0x P/E, and 8x EV/EBITDA applied to our estimates on a rolling 2Y forward basis. Upside scenario Our upside scenario reflects higher rates of growth in Civil (67% CAGR F2013AF2016E) and slight decline in Military. Our forecasts incorporate: 1) expectations of increased penetration of simulated training in Military (particularly the US), which should largely offset the expected declines in overall force structure and budget; and 2) modest margin expansion of ~0.51.0% on higher revenues. On higher growth, we value CAE on 17.0x P/E, 8.5x EV/EBITDA, and our DCF model. Downside scenario Our downside scenario incorporates more conservative outlook for Civil (2% revenue CAGR F2013AF2016E), with declines in Military intensifying (-8% revenue CAGR F2013A F2016E). We expect resilient growth in NCM of ~10% annually to offset some of these declines. However, on lower revenues and expectations of pricing/competitive pressures, we also expect margin compression of 34% in Civil and ~3% in Military. On lower growth and intensifying headwinds from Military, we value CAE on 13.0x P/E, 6.5x EV/EBITDA, and our DCF model.

Key Considerations and Earnings Drivers


We would consider: 1) Civil air traffic demand growth and airline utilization, leading to growth in aircraft fleet; 2) shortage/surplus status of pilots, air crews, and technicians; 3) state of military budgets globallywe expect declines in the US and Western Europe, partially offset by growth in Asia and other International markets; 4) contract order flow in both the Civil and Military segments; and 5) operational improvements, leading to margin expansion (in particular in the Civil training segment).

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

CAE Inc.

CAE A diversified business mix


While many still associate CAE with Full Flight Simulator sales, that segment now represents less than onequarter of the business Over the past decade-plus, CAE has made solid strides to diversify its business. While many still associate CAE with Full Flight Simulator (FFS) sales, that segment now represents less than one-quarter of the business. Simulator development and sales are clearly core capabilities, but CAEs business is now spread across three key areas: Civil serves commercial aviation markets and includes both Civil Simulation Products and Civil Training and Services. Bolstered by the acquisition of Oxford Aviation, the Civil segments now contribute ~56% of total revenue. Military includes Military Training and Services and Military Simulation Products. This business is supported by a large backlog in this sector but has been affected by deferrals in order flow given ongoing government budget issues. New Core Markets is a relatively new business segment offering simulation technology for training in the healthcare and mining industries. This division contributes a relatively small (6%) share of revenue.

Exhibit 2: CAEs F2014E revenue mix


New Core Market 6% Military Training & Services 12% Civil Simulation Products 23%

Military Simulation Products 26% Civil Training & Services 33%


Source: Company reports, RBC Capital Market estimates

Key competitive advantages: 1) Global footprint 2) Market leadership 3) Established customer relationships 4) Technology platform and R&D investments

CAEs global footprint and favourable industry dynamics expected to drive growth
CAE has been a leading player in the industry for more than 50 years. Its legacy and scale offer a number of significant competitive advantages: Global footprint: CAE has been serving carriers and government organizations in most regions of the world for many decades. Established customer relationships: Airlines rely on CAEs services and technology for their most important considerationsafety. Market leadership: CAEs scale enables it to invest heavily in R&D to drive technology advances for the industry. It also facilitates stronger margin performance, with fixed costs and investments spread across a wider business base.

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

CAE Inc.

Key business segments and drivers


Civil Training and Services
Although a very fragmented market, CAE and its JVs command an 18% share of the market by number of simulators operated. Moreover, CAE (along with its JVs) has the most extensive global network of training locations (~50 locations globally. The next largest, FlightSafety, has 36 locations, largely in continental US). Importantly, CAE is well-established in the highergrowth regions, including Asia and the Middle Eastern regions. Exhibit 3: Civil Training & Services CAE operates 18% of industry installed simulator base
CAE 18%

Others 23%

FSI Training Centre 19% Boeing Flight Services 4% Pan Am/ANA 4%

Airlines 32%

Note: CAE, FSI, and Boeing market shares include their respective JV centres with other airlines/manufacturers Airlines also includes cargo carriers such as Fedex and UPS, and Helicopter operators Source: Halldale and RBC Capital Markets estimates

Exhibit 4: CAE is more geographically diverse relative to industry competitors


100%

Share of Operated Sim. Base

90% 80% 70% 60% 50% 40% 30% 20% 10% 0%

12% 7%

17%

7% 6% 21%

10%

1% 1% 34%

2% 25%

41%

44% 21% 37% 88% 75%

40%

30% 29% 10%

43%

CAE Training Centres North America


Source: Halldale, RBC Capital Markets

CAE JVs Europe

CAE (Total) APAC & North Asia

FSI Training Centres

Boeing Flight Services Middle East & Africa

Pan Am/ANA LATAM & Caribbean

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

CAE Inc.

Multiple drivers of flight simulation and training: 1) Pilot demographics 2) Regulated training requirements 3) Passenger traffic 4) Aircraft deliveries

The Civil Training and Services market is expected to see continued growth, driven by several key industry factors: Global pilot shortage: Aging pilots in developed countries and fleet expansions in emerging economies have led to a strong demand for new and experienced pilots. Boeing estimates the requirement for ~500K new pilots in the next 20 years, largely from the Asia Pacific region (Exhibit 5). Changing regulations on pilot licensing: Some recent changes in training requirements, particularly the US FAA mandating 1,500 hours of flight training (or the ATP License) for commercial airline co-pilots (as compared to the earlier requirement of a Commercial Pilot License and ~250 hours of minimum flying time) would have a favourable impact on training centres.

Exhibit 5: Boeing estimates demand for 498,000 Pilots from 2013 through 2032 globally
Africa 3% Middle East 8% Latin America 10% CIS 3%

Asia Pacific 39%

North America 17% Europe 20%


Source: Boeing

Civil Simulator Products


CAE is the dominant player in the development of Full Flight Simulators, with an estimated ~70% share of recent orders and ~50% share of FFS currently in use globally.

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

CAE Inc.

Exhibit 6: CAE has ~50% share of the globally installed simulator base (as of October 2013)
Others 9%

L-3 Link 21%

CAE 47%

FSI 23%
Source: Halldale and RBC Capital Markets estimates

The Civil FFS industry is driven by a number of factors: Global growth in passenger air traffic. Growth in aircraft deliveries and airline fleet sizes, and correspondingly increased production targets by Airbus and Boeing. Introduction of new aircraft types. Pilot demographics and training requirements, as discussed above.

Exhibit 7 highlights the RBC Capital Markets A&D teams aircraft delivery forecast for the Boeing and Airbus companies, expected to grow at a CAGR of ~3%. Exhibit 8 shows that over a 20-year time period, Boeing and Airbus estimate the overall global fleet size to double. Exhibit 7: Airbus and Boeing aircraft delivery forecast
1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 588 618 629 664 676 711 730 731 737 601 650 751 758 758 755 764 774 791

Exhibit 8: 20-year growth outlook for global fleet size


50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 -

~36,000-41,000

No. of Aircrafts

No. of Aircrafts

Growt h Demand ~18,000-20,0000 Replacement Demand

2013E

2014E

2015E

2016E

2017E

2018E

2019E

2012A

Airbus

Boeing
Source: Airbus and Boeing market outlook, RBC Capital Markets estimates

Source: Company reports and RBC Capital Markets A&D team estimates

December 4, 2013

2020E

Current Fleet Size Total Cumulative Total Fleet Size (2012) Deliveries (2013(2032) 2032)

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

CAE Inc.

Military business
While this sector is impacted by declining defence budgets, CAE is shielded (to some extent) by its geographical footprint and established relationships. CAE has clearly felt a slowdown in order flow, largely a result of decisions being deferred rather than contracts being lost. To defend margins in the current environment, CAE has recently undertaken extensive restructuring efforts, particularly in its European facilities. CAE continues to have a very active pipeline, however, and has continued to secure contracts with military organizations in the US and around the globe. Exhibit 9: The United States accounted for only ~30% of Military revenue in F2011
United States 30%

ROW 32%

Europe 38%
Source: Company reports, RBC Capital Markets

A recent military simulator census (conducted by Flightglobal) shows that CAE is the secondlargest in the military simulation market with a 16% share of the 1,600+ installed military simulator base, next only to L-3 Link with a 21% market share (Exhibit 10). The Military business now represents a smaller share of CAEs revenue (~38% as compared to historical levels of 50%+), and we expect lower growth from this segment over the next several years. Exhibit 10: Military Simulation Products market share based on installed simulator base

Others 27%

L-3 Link Simulation & Training 21%

Boeing 11% FSI 12%


Source: Flightglobal, RBC Capital Markets

CAE 16%

Thales 13%

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

CAE Inc.

Base forecast suggests solid revenue (+4% CAGR) and earnings (+13%) growth
Recent moves should support revenue growth and margin expansion
We expect revenue to increase at a CAGR of 4.1%, and operating margins to improve toward ~17% by F2016E Over the past year, CAE has been actively addressing end-market realities: military delays, soft European demand, and integration of a major acquisition (Oxford Aviation). We have seen restructuring and operational streamlining, including the relocation of simulators from areas with overcapacity in the training network to regions with stronger demand. With much of that work now completed, we expect to see increased top-line and margin growth over the next several quarters. For our F2016E (ended March) outlook, we expect revenue to increase at a CAGR of 4.1%, largely driven by growth in the Civil Business (F2013F2016E CAGR of 6.7%) and offset by modest annual declines in CAEs Military divisions. We expect steady margin improvements, with corporate operating margins expected to improve toward ~17% by F2016E. Exhibit 11: CAE forecast F2014EF2016E
INCOME STATEMENT ($MM) CAE Inc. (Year End March 31) Jun-13 Sep-13 Dec-13 Mar-14 F2013A Q1/14 Q2/14 Q3/14E Q4/14E F2014E F2015E F2016E 124 178 138 61 30 530 428 40 103 19.3% 63 11.8% 37 7.1% $0.18 $0.14 $0.05 260.2 260.2 103 166 124 68 27 488 382 41 106 21.7% 65 13.4% 38 7.9% $0.15 $0.15 $0.05 261.0 261.5 127 181 133 65 31 537 419 39 118 21.9% 79 14.7% 46 8.6% $0.18 $0.18 $0.06 261.0 261.5 137 192 149 68 31 578 449 43 129 22.4% 86 14.9% 52 9.0% $0.20 $0.20 $0.06 261.0 261.5 491 718 544 262 119 2,133 1,678 162 455 21.3% 293 13.7% 174 8.2% $0.70 $0.67 $0.22 261.0 261.5 527 812 545 264 131 2,278 1,743 176 534 23.5% 358 15.7% 220 9.7% $0.84 $0.84 $0.24 261.0 261.5 511 897 547 271 146 2,372 1,791 189 580 24.5% 391 16.5% 251 10.6% $0.96 $0.96 $0.24 261.0 261.5 CAGR F13-F16E 8.3% 5.9% (0.9%) (0.3%) 9.2% 4.1% 3.1% 7.1% 7.6%

Revenue Summary: Civil Simulation Products Revenues 402 Civil Training & Services Revenues 756 Military Simulation Products Revenues 562 Military Training & Services Revenues 273 New Core Markets 112 Revenues 2,105 Total Operating Costs Total Depreciation & Amortization EBITDA Total EBITDA Margin % EBIT Total EBIT Margin % Adjusted Net Income Adj. Net Income Margin % EPS (F.D) Adj. EPS (F.D) Dividends Per Share Wtd. Avg. Shares O/S (Basic) (in MMs) Wtd. Avg. Shares O/S (FD) (in MMs) 1,633 157 472 22.4% 315 14.9% 174 8.3% $0.54 $0.67 $0.19 259.0 259.4

13.0%

12.7% 8.1%

Source: Company reports, RBC Capital Markets estimates

Solid cash flow drives balance sheet improvement post-Oxford


Solid cash flows support deleveraging (Net Debt/EBITDA now 1.9x) and dividend increases In May 2012 (mid-FQ1/13), CAE acquired Oxford Aviation for $314MM, funded by a new senior unsecured credit facility. This acquisition increased CAEs Net Debt to just under $1B, (or 2.2x Net Debt/EBITDA). Deleveraging of balance sheet remains a current priority for management. We have seen the company tracking well on this measure, having met its target of <40% net debt to capital ratio in FQ2/14. We expect the balance sheet to continue to improve, gradually returning to its preacquisition levels of net debt/EBITDA and a better free cash flow position.

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

CAE Inc.

Exhibit 12: Net debt declining after spike in F2013


1000 900 800 700 600 500 400 300 200 100 0 2.5x

Exhibit 13: Improving cash flow position


300

Net Debt ($MM)

Net Debt/EBITDA

2.0x 1.5x 1.0x 0.5x -

Free Cash Flow ($MM)

Oxford Acquisition

250 200 150 100 50 0 132 68

Oxford Acquisition

236 211

141

48

F2011A

F2012A

F2013A

F2014E

F2015E

F2016E

Net Debt

Net Debt/EBITDA

F2011A F2012A F2013A F2014E F2015E F2016E

Source: Company reports, RBC Capital Markets estimates

Source: Company reports, RBC Capital Markets estimates

In addition, CAE has seen increasing dividends in the last five-year period, and it recently announced another quarterly increase of 20%. We see this as a positive sign and a reflection of managements confidence in operational improvements and focus on cashflow . Exhibit 14: Increasing dividends over the years
0.30

Dividend Per Share ($)

0.25 0.20 0.15 0.15 0.10 0.05 F2010A F2011A F2012A F2013A 0.12 0.16 0.19

0.24 0.22

0.24

F2014E

F2015E

F2016E

Source: Company reports, RBC Capital Markets estimates

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

CAE Inc.

Valuation attractive relative to A&D peers


CAE has historically traded at a premium valuation versus peers, supported by its unique technology base and market position (Exhibit 15). However, with recent operational issues, CAEs shares have lagged A&D peers. Currently, CAE trades at 6.6x C2015E EV/EBITDA and 12.7x C2015E P/E, a material discount relative to US Aerospace peers (9.3x C2015E EV/EBITDA and 15.0x C2015E P/E). We expect the valuation gap to narrow as evidence builds regarding operational and margin improvements. As seen in Exhibit 16, our estimates suggest an EBITDA CAGR of 12.0% (C2013E15E) for CAE, significantly higher than the 11.3% and 4.6% forecasts for the Aerospace and Defence peer groups, respectively, over the same period. Exhibit 15: CAE has historically commanded a premium valuation relative to the Aerospace & Defense peer group
Forward EV/EBITDA multiples Forward P/E multiples

14.0

30.0 25.0

EV/EBITDA (NTM)

12.0 10.0 8.0 6.0 4.0

P/E (NTM) Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

20.0 15.0 10.0 5.0

CAE-T

A&D Peer Group Average

Source: ThomsonOne, Company reports, RBC Capital Markets estimates

December 4, 2013

Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13
CAE-T A&D Peer Group Average

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

10

CAE Inc.

Exhibit 16: Comparable companies CAE trades at a material discount to Aerospace peers
2013E2013E2013E15E 15E 15E EPS P/E EBITDA EV/EBITDA Revenue CAGR CY2013 CY2014CY2015 CAGR CY2013 CY2014CY2015 CAGR 7.1% 13.8x 12.5x 12.0x 2.6% 7.8x 7.4x 7.4x (0.8%) 13.3% 16.0x 13.6x 12.5x 4.1% 9.3x 8.2x 8.5x (0.3%) 14.1% 15.6x 13.4x 12.0x 4.2% 8.7x 8.0x 8.0x (1.8%) 15.8% 16.9x 14.2x 12.6x 9.3% 9.7x 8.6x 8.1x (1.0%) 2.1% 14.0x 13.4x 13.5x (2.1%) 7.5x 7.7x 7.8x (0.9%) 3.9% 13.2x 12.6x 12.2x (0.7%) 8.9x 8.9x 9.1x (1.7%) 12.4% 14.0x 11.9x 11.1x 10.5% 8.1x 6.9x 6.7x (1.4%) 16.0% 14.5x 11.8x 10.8x 8.8% 7.7x 6.8x 6.5x 4.7% (3.1%) 12.2x 12.5x 13.0x (2.9%) 7.2x 7.4x 7.6x (2.0%) 13.1% 18.9x 16.0x 14.7x 4.2% 9.3x 8.7x 8.5x 3.3% 5.6% 12.0x 11.0x 10.8x 1.6% 6.2x 5.9x 6.0x (2.5%) 37.1% 21.9x 13.7x 11.7x 17.6% 8.5x 6.7x 6.2x (0.1%) (4.8%) 13.8x 15.3x 15.2x (6.0%) 5.8x 6.3x 6.5x (4.4%) 8.2% 19.4x 18.0x 16.6x 9.2% 12.1x 10.7x 10.2x 3.7% 12.9% 19.4% 15.5x 13.4x 18.1x 14.8x 12.4x 12.7x 4.6% 12.0% 8.8x 8.3x 8.0x 7.2x 8.0x 6.6x (0.7%) 3.0%

Defense Companies Thomson Company Name Ticker General Dynamics Corp GD-N Lockheed Martin Corp LMT-N Northrop Grumman Corp NOC-N Raytheon Co RTN-N Harris Corp HRS-N L-3 Communications Holdings IncLLL-N Science Applications International SAIC-N Corp Alliant Techsystems Inc ATK-N Caci International Inc CACI-N Curtiss-Wright Corp CW-N Exelis Inc XLS-N Huntington Ingalls Industries Inc HII-N Mantech International Corp MANT-O Teledyne Technologies Inc TDY-N Defence Wtd. Average Cae Inc CAE-T

Price** $90.34 $138.77 $112.52 $88.78 $64.21 $102.68 $34.76 $120.39 $72.13 $52.16 $17.44 $83.00 $28.19 $90.47 $11.89

Mkt Cap EV (US$MM) (US$MM) 31,884 32,034 45,447 48,942 26,724 27,749 28,703 29,709 6,890 8,223 9,375 12,714 1,703 1,704 3,899 4,951 1,791 2,310 2,507 3,256 3,362 3,702 4,200 5,113 1,048 989 3,447 4,051 2,923 3,534

Aerospace Companies Thomson Company Name Ticker Boeing Co BA-N Honeywell International Inc HON-N Precision Castparts Corp PCP-N United Technologies Corp UTX-N Embraer Sa ERJ-N Bombardier Inc BBD'B-T Rockwell Collins Inc COL-N B/E Aerospace Inc BEAV-O Heico Corp HEI-N Hexcel Corp HXL-N Spirit Aerosystems Holdings Inc SPR-N Wesco Aircraft Holdings Inc WAIR-N Aerospace Wtd. Average Wtd. Average (Peers) Cae Inc CAE-T

Price** $132.00 $87.07 $256.36 $109.69 $30.03 $4.65 $72.47 $86.20 $55.24 $43.13 $31.78 $20.43

2013E2013E2013E15E 15E Mkt Cap EV 15E EPS P/E EBITDA EV/EBITDA Revenue (US$MM) (US$MM) CAGR CY2013 CY2014 CY2015 CAGR CY2013 CY2014 CY2015 CAGR 101,521 95,322 10.9% 19.6x 17.6x 16.0x 13.5% 11.8x 9.8x 9.2x 4.2% 69,403 72,094 10.9% 17.6x 15.7x 14.3x 6.5% 10.3x 9.8x 9.1x 3.0% 37,557 41,105 26.3% 26.3x 18.8x 16.5x 13.8% 14.5x 12.6x 11.2x 5.5% 100,268 118,481 11.5% 17.8x 16.0x 14.3x 8.9% 10.7x 9.8x 9.0x 2.1% 5,559 9,281 11.4% 12.0x 10.0x 9.7x 11.7% 10.5x 9.2x 8.4x 3.9% 7,617 11,844 18.9% 12.4x 10.0x 8.8x 12.0% 8.8x 7.7x 7.0x 5.6% 10,305 10,913 6.5% 15.8x 15.8x 13.9x 9.0% 10.2x 9.3x 8.6x 5.2% 8,965 10,351 19.7% 24.3x 19.8x 16.9x 17.3% 14.6x 12.2x 10.6x 9.2% 3,702 4,174 16.0% 37.0x 31.7x 27.5x 11.6% 18.8x 16.6x 15.1x 7.0% 4,386 4,593 14.5% 23.4x 20.5x 17.8x 13.0% 13.4x 11.8x 10.5x 5.9% 4,557 5,292 138.5% 63.4x 11.9x 11.2x 61.4% 16.3x 6.6x 6.2x 5.0% 1,960 2,479 14.2% 17.0x 14.7x 13.0x 11.1% 12.2x 11.0x 9.9x 5.8% 14.8% 19.9x 16.7x 15.0x 11.3% 11.6x 10.1x 9.3x 3.8% 2,923 3,534 19.4% 18.5x 15.7x 18.1x 14.8x 14.2x 12.7x 9.1% 12.0% 10.7x 8.3x 9.4x 7.2x 8.9x 6.6x 2.3% 3.0%

$11.89

Source: ThomsonONE, RBC Capital Markets estimates

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

11

CAE Inc.

Reiterating Outperform rating and $14 price target


We expect that the shares will react positively to growing evidence of operating margin improvement, and we recommend investors build positions ahead of that Our price target is derived based on an average of our DCF model, 15x P/E and 8.0x EV/EBITDA multiples applied to our rolling two-year forward estimates. These multiples are roughly in line with A&D peers, although we would argue that a modest premium would be justified based on CAEs leading market position, unique techno logy base, global footprint, longstanding customer relationships, and solid earnings growth trajectory. We expect that the shares will react positively to growing evidence of operating margin improvement over the next several quarters, and we recommend investors build positions ahead of that.

Exhibit 17: Reiterating Outperform and $14 price target


PRICE TARGET Average Implied Price: $14.46 Target Price: $14.00 Implied Price Based On P/E P/E Multiple: 15.0x Q2/15E - Q1/16E EPS $0.88 Calculated Target Price: $13.23
Source: RBC Capital Markets estimates

Implied Price Based On EV/EBITDA EV/EBITDA Multiple: 8.0x Q2/15E - Q1/16E EBITDA 548.7 Calculated Target Price: $15.01

Implied Price Based On DCF WACC: 9.6% Terminal Growth Rate: 3.0% Calculated Target Price: $15.14

Near-term EPS and price target sensitivity to improvement in Civil margins


As discussed, we believe that much of the heavy lifting has been done with CAEs restructuring and simulator redeployment initiatives efforts over the past 1218 months. We expect this will translate into Civil (and particularly Civil Training and Services) operating margin improvement from recent period lows. We expect further margin expansion in F2H/14E, followed by greater improvement by mid-F2015E. Exhibit 18: Aggregate Civil margins have been impacted by Oxford acquisition and ongoing restructuring
400.0 350.0 300.0 250.0 200.0 150.0 100.0 50.0 10.0% 15.0% 20.0% 150.0 100.0 50.0 20.0% 15.0% 10.0% 5.0% 25.0%

Exhibit 19: Civil Training and Services revenues and margins are seen rebounding after hitting FQ1/14 lows
250.0 200.0 30.0% 25.0%

Q3/14E

Q4/14E

Q1/15E

Q2/15E

Q3/15E

Q3/14E

Q4/14E

Q1/15E

Q2/15E

Q3/15E

Q4/15E

Q1/13

Q2/13

Q3/13

Q4/13

Q1/14

Q2/14

Revenue ($MM) [LHS] EBIT (Adjusted for One Time Items) % [RHS]
Note 1: EBIT adjusted for one time non recurring gains, estimated FX gains and charges. Note 2: Financials presented herein include recent changes for IFRS 11, and IAS 19 (Amended). Source: Company reports, RBC Capital Market estimates

Revenue ($MM) [LHS] EBIT (Adjusted for One Time Items) % [RHS]
Note: EBIT adjusted for one time non recurring gains, estimated FX gains and charges. Note 2: Financials presented herein include recent changes for IFRS 11, and IAS 19 (Amended). Source: Company reports, RBC Capital Market estimates

December 4, 2013

Steve Arthur

Q4/15E

Q1/13

Q2/13

Q3/13

Q4/13

Q1/14

Q2/14

(416) 842-7844; steve.arthur@rbccm.com

12

CAE Inc.

However, our current estimates are still somewhat conservative relative to management expectation of high teens operating margins starting F2H/14E. Exhibit 20 illustrates the impact on F2015E EPS and price target in scenarios of any EBIT margin upside relative to our base estimate of 15.0% in F2014E and 17.7% in F2015E. Exhibit 20: Exploring the impact of near-term margin improvement beyond our base forecast
Increment in Civil Margins (bps) Beyond Our Base Forecast (50) 0 (Base) Implied Civil EBIT % (F14E) Implied Civil EBIT % (F15E) Implied Civil EBITDA % (F14E) Implied Civil EBITDA % (F15E) EPS Increase (F14E) EPS Increase (F15E) Price Target Increase (Based on F15E) 14.7% 17.2% 23.9% 26.5% (0.01) (0.02) (0.25) 15.0% 17.7% 24.2% 27.0% 0.00 0.00 0.00 50 15.2% 18.2% 24.5% 27.5% 0.01 0.02 0.25 100 15.5% 18.7% 24.7% 28.0% 0.02 0.04 0.50 150 15.8% 19.2% 25.0% 28.5% 0.03 0.06 0.75 200 16.0% 19.7% 25.3% 29.0% 0.04 0.08 1.00 250 16.3% 20.2% 25.5% 29.5% 0.05 0.10 1.25

Source: RBC Capital Markets estimates

Price target sensitivity to trading multiples


Our base case assumes 15.0x P/E and 8.0x EV/EBITDA multiples. While this is in line with the current multiples of A&D peers, CAE has historically commanded a premium valuation. Should improved operating and financial performance boost investor sentiment, we may well see the shares trade 12 multiple points higher. Plausible variances in trading multiples could result in a -$1 to +$3 change to our current $14 target. Exhibit 21: Price target sensitivity to trading multiples
P/E

Aerospace peer valuation would suggest a target of $1317


EV/EBITDA

12.0x 6.5x 7.0x 7.5x 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x 11.00 12.00 12.00 13.00 13.00 14.00 14.00 15.00 16.00

13.0x 12.00 12.00 13.00 13.00 14.00 14.00 15.00 15.00 16.00

14.0x 12.00 13.00 13.00 14.00 14.00 15.00 15.00 16.00 16.00

15.0x 13.00 13.00 14.00 14.00 15.00 15.00 16.00 16.00 17.00

16.0x 13.00 14.00 14.00 15.00 15.00 16.00 16.00 17.00 17.00

17.0x 14.00 14.00 15.00 15.00 16.00 16.00 17.00 17.00 18.00

18.0x 14.00 15.00 15.00 16.00 16.00 17.00 17.00 18.00 18.00

19.0x 14.00 15.00 15.00 16.00 17.00 17.00 18.00 18.00 19.00

Source: RBC Capital Markets estimates

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

13

CAE Inc.

Assessing five-year earnings scenarios


Looking out over the next five years, we see continued earnings progression driven by a number of factors: Higher efficiency (utilization rate and deployment of capital) across the training centres. Modest growth in the number of FFS sales. Stabilization, and then gradual growth, in the Military business (in particular in the outer years as the use of simulator-based training gains momentum because of its much lower cost profile).

Here, we review: Our base long-term forecast for C2018E. Perspectives on 3- to 4-year share price objectives, based on that five-year earnings outlook. Earning and share price scenarios (five-year view) by varying several key parameters: Civil Training and Services: The utilization rate for simulators and the total number of simulators deployed (Simulator Equivalents or RSEU). Civil Products: The number of annual simulators sold (and their average price). Military: Order flow in both Military products and Military training and services Multiples: Varying target EV/EBITDA and P/E metrics.

Base long-term forecast suggests $2022 share price in 34 years


Looking out over the next approximately five years, our base forecast reflects CAE revenue CAGR of 5.5% to $2.8B, generating EPS of $1.31 (14.8% CAGR).

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

14

CAE Inc.

Exhibit 22: Base case long-term (C2018E) earnings forecast


INCOME STATEMENT ($MM) CAE Inc. (Year End March 31) C2013E Revenue Summary: Civil Simulation Products Revenues Civil Training & Services Revenues Military Simulation Products Revenues Military Training & Services Revenues New Core Markets Revenues Total Operating Costs Total Depreciation & Amortization EBITDA Total EBITDA Margin % EBIT Total EBIT Margin % Adjusted Net Income Adj. Net Income Margin % EPS (F.D) Adj. EPS (F.D) Dividends Per Share Wtd. Avg. Shares O/S (Basic) (in MMs) Wtd. Avg. Shares O/S (FD) (in MMs)
Source: Company reports, RBC Capital Markets estimates

C2018E 581 1,028 679 320 200 2,807 2,099 219 708 25.2% 489 17.4% 342 12.2% $1.31 $1.31 $0.24 261.0 261.5

CAGR C13E-C18E 3.7% 7.2% 4.3% 3.8% 11.3% 5.5% 4.5% 6.1% 9.2% 10.9%

483 727 550 266 117 2,143 1,688 163 455 21.2% 292 13.6% 171 8.0% $0.67 $0.66 $0.22 261.0 261.5

14.8%

14.8% 1.8%

Using current target multiples applied to our C2018E preliminary earnings forecast implies a 3- to 4-year share price objective of ~$21 (a 1520% implied compounded annual return). Discounted back, this implies a one-year objective of ~$15, just above our current target. Exhibit 23: Price target outlook (C2018E)
C2018E ACTUAL PRICE TARGET Average Target Price $20.59 Actual Target Price: $21.00 Discounted Target 15.00 Target based on P/E P/E Multiple: 15.0x C2018E EPS: $1.31 Calculated Target Price: $19.60 Target based on EV/EBITDA EV/EBITDA Multiple: 8.0x C2018E EBITDA ($MM): 707.9 Calculated Target Price: $21.57

Source: Company reports, RBC Capital Markets estimates

Again, varying target multiples yields plausible 3- to 4-year values of ~$1824.

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

15

CAE Inc.

Exhibit 24: Long-term target price sensitivity to trading multiples


P/E 12.0x 6.5x 7.0x
EV/EBITDA

13.0x 17.00 18.00 19.00 19.00 20.00 21.00 21.00 22.00 23.00

14.0x 18.00 19.00 19.00 20.00 21.00 21.00 22.00 23.00 23.00

15.0x 19.00 19.00 20.00 21.00 21.00 22.00 23.00 23.00 24.00

16.0x 19.00 20.00 21.00 21.00 22.00 23.00 23.00 24.00 25.00

17.0x 20.00 21.00 21.00 22.00 23.00 23.00 24.00 25.00 25.00

18.0x 21.00 21.00 22.00 23.00 23.00 24.00 25.00 25.00 26.00

19.0x 21.00 22.00 23.00 23.00 24.00 25.00 25.00 26.00 27.00

17.00 17.00 18.00 19.00 19.00 20.00 21.00 21.00 22.00

7.5x 8.0x 8.5x 9.0x 9.5x 10.0x 10.5x

Source: RBC Capital Markets estimates

Five-year earnings sensitivity to key operating parameters


From our $21 base case long-term share price objective, we consider the expected earnings and share price impact of varying key operating parameters: Plausible scenarios add up to $6 to longer-term price objective Exhibit 25: Summary of findings
Price Target Upside Downside $21.00 $4.00 ($3.25) $1.00 ($1.75) $1.75 ($1.00) EPS Upside $1.31 $0.29 $0.08 $0.13 Downside ($0.25) ($0.14) ($0.08)

Base Civil Training & Services Civil Simulation Products Military Products & Training Services
Source: Company reports, RBC Capital Markets estimates

Civil Training and Services EPS and price target sensitivity to varied utilization rates and simulator counts
Historically, on an annual basis we have seen simulator utilization peak to ~82% and trough to ~64%. With the Oxford acquisition, CAE has been able to further widen its training network coverage and increase the total number of simulators deployed, although in the near term this has come at the expense of utilization rates and margins. Keeping our base target at 72% utilization and 232 RSEUs, we have assessed sensitivity to the forecasted C2018E EPS and price target and seen a variance of -$0.25 to +$0.29 in C2018E EPS and -$3.25 to +$4.00 in price target for plausible scenarios.

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

16

CAE Inc.

Exhibit 26: Change in EPS with no. and utilization of sims


Average RSEUs 199 (15%) 211 (10%) 222 234 246 5% 257 10% 269 15% 281 20%

Exhibit 27: Change in price target with no. and utilization of sims
Average RSEUs 199 (15%) 211 (10%) 222 234 246 5% 257 10% 269 15% 281 20% (5%) Base

(5%) Base

64.0% $ (0.43) $ (0.40) $ (0.37) $ (0.33) $ (0.30) $ (0.27) $ (0.23) $ (0.20) 66.0% $ (0.36) $ (0.32) $ (0.29) $ (0.25) $ (0.21) $ (0.17) $ (0.13) $ (0.10)

64.0% $ (5.75) $ (5.25) $ (4.75) $ (4.25) $ (3.75) $ (3.25) $ (2.50) $ (2.00) 66.0% $ (5.00) $ (4.25) $ (3.75) $ (3.25) $ (2.50) $ (2.00) $ (1.50) $ (0.75)

Utilization %

Utilization %

68.0% $ (0.29) $ (0.25) $ (0.21) $ (0.16) $ (0.12) $ (0.08) $ (0.04) $ 0.00 70.0% $ (0.22) $ (0.17) $ (0.13) $ (0.08) $ (0.03) $ 0.01 $ 0.06 $ 0.10 72.0% $ (0.15) $ (0.10) $ (0.05) $ 0.00 $ 0.05 $ 0.10 $ 0.15 $ 0.21 74.0% $ (0.08) $ (0.02) $ 0.03 $ 0.09 $ 0.14 $ 0.19 $ 0.25 $ 0.31 76.0% $ (0.01) $ 0.06 $ 0.11 $ 0.17 $ 0.23 $ 0.29 $ 0.35 $ 0.41 78.0% $ 0.07 $ 0.13 $ 0.19 $ 0.25 $ 0.32 $ 0.38 $ 0.44 $ 0.51 80.0% $ 0.14 $ 0.21 $ 0.27 $ 0.34 $ 0.41 $ 0.47 $ 0.54 $ 0.61

68.0% $ (4.00) $ (3.25) $ (2.75) $ (2.00) $ (1.50) $ (0.75) $ (0.25) $ 0.50 70.0% $ (3.00) $ (2.50) $ (1.75) $ (1.00) $ (0.25) $ 0.25 $ 1.00 $ 1.75 72.0% $ (2.25) $ (1.50) $ (0.75) $ 0.00 $ 0.75 $ 1.50 $ 2.25 $ 3.00 74.0% $ (1.25) $ (0.50) $ 0.25 $ 1.00 $ 2.00 $ 2.75 $ 3.50 $ 4.25 76.0% $ (0.50) $ 0.50 $ 1.25 $ 2.25 $ 3.00 $ 4.00 $ 4.75 $ 5.75 78.0% $ 0.50 $ 1.50 $ 2.25 $ 3.25 $ 4.25 $ 5.00 $ 6.00 $ 7.00 80.0% $ 1.50 $ 2.50 $ 3.25 $ 4.25 $ 5.25 $ 6.25 $ 7.25 $ 8.25

Source: RBC Capital Markets estimates

Source: RBC Capital Markets estimates

Civil Simulator Products EPS and price target sensitivity to simulator sales/ASPs
Civil simulation products have seen an increasing order book given global commercial fleet expansions. Management expects to close F2014E with record-high sales of 40 FFS. Looking five years out, our base case forecast reflects the sale of 43 FFS at an average price of $13.8MM/simulator. Sensitivity around these metrics could result in a variance of -$0.14 to +$0.08 in C2018E EPS and -$1.75 to +$1.00 in price target. Exhibit 28: Change in C2018E EPS with simulator sales/ASPs
# Sims Booked 6 months Prior 37 (15%) 39 (10%) 41 43 45 5% 47 10% 49 15% 52 20%
Average Booking Per FFS
37 (15%)

Exhibit 29: Change in target price with simulator sales/ASPs


# Sims Booked 6 months Prior 39 (10%) 41 43 45 5% 47 10% 49 15% 52 20% (5%) Base

(5%) Base

Average Booking Per FFS

8.0 9.0 10.0 11.0 12.0 13.0 14.0 15.0 16.0

($0.21) ($0.20) ($0.19) ($0.18) ($0.17) ($0.15) ($0.14) ($0.12) ($0.18) ($0.17) ($0.16) ($0.15) ($0.13) ($0.12) ($0.11) ($0.09) ($0.16) ($0.14) ($0.13) ($0.11) ($0.10) ($0.09) ($0.07) ($0.05) ($0.13) ($0.12) ($0.10) ($0.08) ($0.07) ($0.05) ($0.04) ($0.01) ($0.10) ($0.09) ($0.07) ($0.05) ($0.03) ($0.02) $0.00 ($0.08) ($0.06) ($0.04) ($0.02) ($0.00) $0.02 ($0.05) ($0.03) ($0.01) $0.01 ($0.02) ($0.00) $0.02 $0.00 $0.03 $0.05 $0.04 $0.07 $0.03 $0.06 $0.10 $0.05 $0.08 $0.12 $0.04 $0.07 $0.11 $0.14 $0.03 $0.06 $0.10 $0.14 $0.18

8.0 ($2.75) ($2.50) ($2.50) ($2.25) ($2.25) ($2.00) ($1.75) ($1.75) 9.0 ($2.50) ($2.25) ($2.00) ($2.00) ($1.75) ($1.50) ($1.50) ($1.25) 10.0 ($2.00) ($1.75) ($1.75) ($1.50) ($1.25) ($1.25) ($1.00) ($0.75) 11.0 ($1.75) ($1.50) ($1.25) ($1.00) ($1.00) ($0.75) ($0.50) ($0.25) 12.0 ($1.25) ($1.25) ($1.00) ($0.75) ($0.50) ($0.25) $0.00 13.0 ($1.00) ($0.75) ($0.50) ($0.25) $0.00 14.0 ($0.75) ($0.50) ($0.25) $0.00 15.0 ($0.25) $0.00 16.0 $0.00 $0.25 $0.25 $0.50 $0.50 $1.00 $0.25 $0.75 $1.25 $0.25 $0.50 $1.00 $1.50 $0.50 $0.75 $1.25 $1.75 $0.25 $0.75 $1.25 $1.75 $2.25

Source: RBC Capital Markets estimates

Source: RBC Capital Markets estimates

Military EPS and PT sensitivity to varied training backlog & simulator bookings
Prior-period simulator bookings and training services backlog translate into next-period revenue for the military business. Keeping in context the slowdown in the overall defence sector, our base case assumes ~$690MM bookings for Military products and ~$1.5B backlog in military training and services for C2017E. The sensitivity around these metrics could result in a variance of -$0.08 to +$0.13 in C2018E EPS and -$1.00 to +$1.75 in price target for the plausible scenarios.

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

17

CAE Inc.

Exhibit 30: Change in EPS with bookings and backlog


C2017E Military SP Bookings 550
C2017E Military T&S Backlog

Exhibit 31: Change in price target with bookings and backlog


C2017E C2017EMilitary MilitarySP SPBookings Bookings 900

600

650

700

750

800

850

550
C2017E Military T&S Backlog

600

650

700

750

800

850

900

900 $ (0.19) $ (0.14) $ (0.10) $ (0.07) $ (0.04) $ (0.01) $ 0.02 $ 0.05 1,100 $ (0.16) $ (0.11) $ (0.07) $ (0.04) $ (0.01) $ 0.02 $ 0.05 $ 0.08 1,300 $ (0.13) $ (0.08) $ (0.04) $ (0.01) $ 0.02 $ 0.05 $ 0.08 $ 0.11 1,500 $ (0.10) $ (0.05) $ (0.01) $ 0.02 $ 0.05 $ 0.08 $ 0.11 $ 0.14 1,700 $ (0.08) $ (0.02) $ 0.01 $ 0.04 $ 0.07 $ 0.10 $ 0.13 $ 0.17 1,900 $ (0.05) $ 0.00 $ 0.04 $ 0.07 $ 0.10 $ 0.13 $ 0.16 $ 0.19 2,100 $ (0.02) $ 0.03 $ 0.07 $ 0.10 $ 0.12 $ 0.16 $ 0.19 $ 0.22 2,300 $ 0.00 $ 0.06 $ 0.09 $ 0.12 $ 0.15 $ 0.18 $ 0.21 $ 0.25 2,500 $ 0.03 $ 0.08 $ 0.12 $ 0.15 $ 0.18 $ 0.21 $ 0.24 $ 0.27

900 $ (2.50) $ (2.00) $ (1.25) $ (1.00) $ (0.50) $ (0.25) $ 0.25 $ 0.75 1,100 $ (2.25) $ (1.50) $ (1.00) $ (0.50) $ (0.25) $ 0.25 $ 0.75 $ 1.00 1,300 $ (1.75) $ (1.00) $ (0.50) $ (0.25) $ 0.25 $ 0.75 $ 1.00 $ 1.50 1,500 $ (1.25) $ (0.75) $ (0.25) $ 0.25 $ 0.75 $ 1.00 $ 1.50 $ 2.00 1,700 $ (1.00) $ (0.25) $ 0.25 $ 0.50 $ 1.00 $ 1.50 $ 1.75 $ 2.25 1,900 $ (0.50) $ 0.00 $ 0.50 $ 1.00 $ 1.25 $ 1.75 $ 2.25 $ 2.50 2,100 $ (0.25) $ 0.50 $ 1.00 $ 1.25 $ 1.75 $ 2.25 $ 2.50 $ 3.00 2,300 $ 0.25 $ 0.75 $ 1.50 $ 1.75 $ 2.25 $ 2.50 $ 3.00 $ 3.50 2,500 $ 0.50 $ 1.25 $ 1.75 $ 2.25 $ 2.50 $ 3.00 $ 3.50 $ 3.75

Source: RBC Capital Markets estimates

Source: RBC Capital Markets estimates

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

18

CAE Inc.

Exhibit 32: CAE financial forecast summary


CAE Inc. (Year End March 31) Revenue Summary: Civil Simulation Products Revenues Civil Training & Services Revenues Military Simulation Products Revenues Military Training & Services Revenues New Core Markets Revenues EBITDA Total EBITDA Margin % EBIT Total EBIT Margin % Interest Expense (Income) Other (Incl. Restructuring Charges) EBT (Before Disc. Ops) Total Income Tax Net Income To Firm Net Gain (Loss) from Discontinued Ops Net Income to Equity Holders Net Income Margin % Non-Operating Items Tax impact on Unusual Items Unusual items net of tax Adjusted Net Income Adj. Net Income Margin % EPS (Basic) EPS (F.D) Adj. EPS (F.D) Dividends Per Share Wtd. Avg. Shares O/S (Basic) (in MMs) Wtd. Avg. Shares O/S (FD) (in MMs)
Source: Company reports, RBC Capital Markets estimates

Jun-12 Sep-12 Dec-12 Mar-13 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Mar-15 Mar-16 Q1/13 Q2/13 Q3/13 Q4/13 F2013A Q1/14 Q2/14 Q3/14E Q4/14E F2014E Q1/15E Q2/15E Q3/15E Q4/15E F2015E F2016E 80 171 135 67 26 480 112 23.3% 77 16.0% 17 32 28 6 22 21 4.4% 32 46 9.6% $0.08 $0.08 $0.18 $0.04 258.4 258.6 99 189 131 67 28 514 115 22.4% 77 14.9% 18 10 49 13 37 37 7.1% (13) 10 34 6.6% $0.14 $0.14 $0.13 $0.05 258.7 259.0 93 194 141 66 29 522 116 22.2% 76 14.5% 16 13 47 9 38 38 7.2% 10 45 8.5% $0.15 $0.15 $0.17 $0.05 259.2 259.5 130 202 155 72 29 588 129 22.0% 85 14.5% 18 14 53 7 46 44 7.5% (5) 10 49 8.4% $0.17 $0.17 $0.19 $0.05 259.7 260.5 402 756 562 273 112 2,105 472 22.4% 315 14.9% 68 69 178 35 142 139 6.6% (18) 62 174 8.3% $0.54 $0.54 $0.67 $0.19 259.0 259.4 124 178 138 61 30 530 103 19.3% 63 11.8% 17 46 0 45 46 8.6% (11) 3 37 7.1% $0.18 $0.18 $0.14 $0.05 260.2 260.2 103 166 124 68 27 488 106 21.7% 65 13.4% 19 47 8 38 38 7.9% 38 7.9% $0.15 $0.15 $0.15 $0.05 261.0 261.5 127 181 133 65 31 537 118 21.9% 79 14.7% 18 61 15 46 46 8.6% 46 8.6% $0.18 $0.18 $0.18 $0.06 261.0 261.5 137 192 149 68 31 578 129 22.4% 86 14.9% 17 69 17 52 52 9.0% 52 9.0% $0.20 $0.20 $0.20 $0.06 261.0 261.5 491 718 544 262 119 2,133 455 21.3% 293 13.7% 70 222 40 182 182 8.5% (11) 3 174 8.2% $0.70 $0.70 $0.67 $0.22 261.0 261.5 132 198 129 63 33 555 125 22.6% 83 14.9% 18 65 16 50 49 8.9% 49 8.9% $0.19 $0.19 $0.19 $0.06 261.0 261.5 127 194 131 66 30 549 127 23.1% 82 15.0% 17 65 16 49 49 9.0% 49 9.0% $0.19 $0.19 $0.19 $0.06 261.0 261.5 132 207 140 66 34 579 138 23.8% 95 16.4% 17 78 19 59 59 10.2% 59 10.2% $0.23 $0.23 $0.23 $0.06 261.0 261.5 135 213 145 69 34 595 145 24.3% 98 16.5% 16 83 20 63 63 10.5% 63 10.5% $0.24 $0.24 $0.24 $0.06 261.0 261.5 527 812 545 264 131 2,278 534 23.5% 358 15.7% 67 291 70 221 220 9.7% 220 9.7% $0.84 $0.84 $0.84 $0.24 261.0 261.5 511 897 547 271 146 2,372 580 24.5% 391 16.5% 60 332 80 252 251 10.6% 251 10.6% $0.96 $0.96 $0.96 $0.24 261.0 261.5

CAGR F13-F16E 8.3% 5.9% (0.9%) (0.3%) 9.2% 4.1% 7.1% 7.6%

21.7%

13.0%

12.7% 8.1%

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

19

CAE Inc.

Valuation
Our 12-month price target is based on a blend of P/E, EV/EBITDA, and DCF metrics, applied to our estimates on a rolling two-year forward basis. We apply multiples of 8x EV/EBITDA, and 15.0x P/E to our estimates, in line with A&D peers with similar commercial/military exposure and historical averages that over the past five years have been 8.1x forward EV/EBITDA and 16.2x forward P/E vs. the industry, which averaged 7.5x and 13.5x, respectively.

Price target impediments


Factors that could limit CAE's ability to reach our price target include: Global military expenditures, particularly US expenditures, decline significantly more than expected, overly impacting simulator/training demand. Competitive pressures from new upstarts and integrated aerospace/defense companies could impact revenues and margin, particularly in the event of an economic downturn. Potential for another financial crisis to freeze credit lines and place airplane purchases on hold. Political review process for simulator equipment sales/training services and contracts could be extended. FX fluctuations, particularly with a strengthening C$, could negatively impact financial results.

Company description
CAE Inc. is a leader in simulation technology and integrated training solutions for the civil aviation industry and global defence forces. The company has the worlds largest installed base of civil and military full-flight simulators and training devices. Over the past 10 years, CAE has diversified into the less cyclical pilot training business, and now offers training services through the a global network of civil aviation and military training centres.

December 4, 2013

Steve Arthur

(416) 842-7844; steve.arthur@rbccm.com

20

CAE Inc.

Required disclosures
Non-U.S. analyst disclosure
Ritika Goel and Anthony Jin (i) are not registered/qualified as research analysts with the NYSE and/or FINRA and (ii) may not be associated persons of the RBC Capital Markets, LLC and therefore may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Conflicts disclosures
The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, including total revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generated by investment banking activities of the member companies of RBC Capital Markets and its affiliates. Please note that current conflicts disclosures may differ from those as of the publication date on, and as set forth in, this report. To access current conflicts disclosures, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/ DisclosureLookup.aspx?entityId=1 or send a request to RBC CM Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. A member company of RBC Capital Markets or one of its affiliates received compensation for investment banking services from CAE Inc. in the past 12 months. RBC Capital Markets, LLC makes a market in the securities of CAE Inc.. RBC Dominion Securities Inc. makes a market in the securities of CAE Inc.. A member company of RBC Capital Markets or one of its affiliates received compensation for products or services other than investment banking services from CAE Inc. during the past 12 months. During this time, a member company of RBC Capital Markets or one of its affiliates provided non-securities services to CAE Inc.. RBC Capital Markets is currently providing CAE Inc. with non-securities services. RBC Capital Markets has provided CAE Inc. with investment banking services in the past 12 months. RBC Capital Markets has provided CAE Inc. with non-securities services in the past 12 months. Michael Fortier, Vice Chairman of RBC Capital Markets, is a member of the Board of Directors of CAE Inc.. The author is employed by RBC Dominion Securities Inc., a securities broker-dealer with principal offices located in Toronto, Canada. An analyst involved in the preparation of this report has visited certain material operations of CAE Inc..

Explanation of RBC Capital Markets Equity rating system


An analyst's 'sector' is the universe of companies for which the analyst provides research coverage. Accordingly, the rating assigned to a particular stock represents solely the analyst's view of how that stock will perform over the next 12 months relative to the analyst's sector average. Although RBC Capital Markets' ratings of Top Pick (TP)/Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis. Ratings Top Pick (TP): Represents analyst's best idea in the sector; expected to provide significant absolute total return over 12 months with a favorable risk-reward ratio. Outperform (O): Expected to materially outperform sector average over 12 months. Sector Perform (SP): Returns expected to be in line with sector average over 12 months. Underperform (U): Returns expected to be materially below sector average over 12 months. Risk Rating
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(416) 842-7844; steve.arthur@rbccm.com

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As of March 31, 2013, RBC Capital Markets suspends its Average and Above Average risk ratings. The Speculative risk rating reflects a security's lower level of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limited operating history that result in a higher expectation of financial and/or stock price volatility.

Distribution of ratings
For the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories - Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/ Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively, the meanings are not the same because our ratings are determined on a relative basis (as described below).
Distribution of ratings RBC Capital Markets, Equity Research As of 30-Sep-2013 Investment Banking Serv./Past 12 Mos. Rating BUY [Top Pick & Outperform] HOLD [Sector Perform] SELL [Underperform] Count 769 656 83 Percent 51.00 43.50 5.50 Count 271 179 13 Percent 35.24 27.29 15.66

References to a Recommended List in the recommendation history chart may include one or more recommended lists or model portfolios maintained by RBC Wealth Management or one of its affiliates. RBC Wealth Management recommended lists include a former list called the Prime Opportunity List (RL 3), the Guided Portfolio: Prime Income (RL 6), the Guided Portfolio: Large Cap (RL 7), the Guided Portfolio: Dividend Growth (RL 8), the Guided Portfolio: Midcap 111 (RL 9), the Guided Portfolio: ADR (RL 10), and the Guided Portfolio: Global Equity (U.S.) (RL 11). RBC Capital Markets recommended lists include the Strategy Focus List and the Fundamental Equity Weightings (FEW) portfolios. The abbreviation 'RL On' means the date a security was placed on a Recommended List. The abbreviation 'RL Off' means the date a security was removed from a Recommended List.

Equity valuation and risks


For valuation methods used to determine, and risks that may impede achievement of, price targets for covered companies, please see the most recent company-specific research report at https://www.rbcinsight.com or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7.
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(416) 842-7844; steve.arthur@rbccm.com

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Conflicts policy
RBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request. To access our current policy, clients should refer to https://www.rbccm.com/global/file-414164.pdf or send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.

Dissemination of research and short-term trade ideas


RBC Capital Markets endeavors to make all reasonable efforts to provide research simultaneously to all eligible clients, having regard to local time zones in overseas jurisdictions. RBC Capital Markets' research is posted to our proprietary websites to ensure eligible clients receive coverage initiations and changes in ratings, targets and opinions in a timely manner. Additional distribution may be done by the sales personnel via email, fax or regular mail. Clients may also receive our research via third-party vendors. Please contact your investment advisor or institutional salesperson for more information regarding RBC Capital Markets' research. RBC Capital Markets also provides eligible clients with access to SPARC on its proprietary INSIGHT website. SPARC contains market color and commentary, and may also contain Short-Term Trade Ideas regarding the securities of subject companies discussed in this or other research reports. SPARC may be accessed via the following hyperlink: https://www.rbcinsight.com. A Short-Term Trade Idea reflects the research analyst's directional view regarding the price of the security of a subject company in the coming days or weeks, based on market and trading events. A Short-Term Trade Idea may differ from the price targets and/or recommendations in our published research reports reflecting the research analyst's views of the longer-term (one year) prospects of the subject company, as a result of the differing time horizons, methodologies and/or other factors. Thus, it is possible that the security of a subject company that is considered a long-term 'Sector Perform' or even an 'Underperform' might be a short-term buying opportunity as a result of temporary selling pressure in the market; conversely, the security of a subject company that is rated a long-term 'Outperform' could be considered susceptible to a short-term downward price correction. Short-Term Trade Ideas are not ratings, nor are they part of any ratings system, and RBC Capital Markets generally does not intend, nor undertakes any obligation, to maintain or update Short-Term Trade Ideas. Short-Term Trade Ideas discussed in SPARC may not be suitable for all investors and have not been tailored to individual investor circumstances and objectives, and investors should make their own independent decisions regarding any Short-Term Trade Ideas discussed therein.

Analyst certification
All of the views expressed in this report accurately reflect the personal views of the responsible analyst(s) about any and all of the subject securities or issuers. No part of the compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific recommendations or views expressed by the responsible analyst(s) in this report.
The Global Industry Classification Standard (GICS) was developed by and is the exclusive property and a service mark of MSCI Inc. (MSCI) and Standard & Poors Financial Services LLC (S&P) and is licensed for use by RBC. Neither MSCI, S&P, nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any of such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

Disclaimer
RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBC Capital Markets, LLC, RBC Europe Limited, RBC Capital Markets (Hong Kong) Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada, Sydney Branch. The information contained in this report has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by Royal Bank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in this report constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for general circulation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The investments or services contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about the suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC Capital Markets research analyst compensation is based in part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment banking revenues. Every province in Canada, state in the U.S., and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as the process for doing so. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. RBC Capital Markets may be restricted from publishing research reports, from time to time, due to regulatory restrictions and/ or internal compliance policies. If this is the case, the latest published research reports available to clients may not reflect recent material changes in the applicable industry and/or applicable subject companies. RBC Capital Markets research reports are current only as of the date set forth on the research reports. This report is

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(416) 842-7844; steve.arthur@rbccm.com

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not, and under no circumstances should be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on the business of a securities broker or dealer in that jurisdiction. To the full extent permitted by law neither RBC Capital Markets nor any of its affiliates, nor any other person, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No matter contained in this document may be reproduced or copied by any means without the prior consent of RBC Capital Markets. Additional information is available on request. To U.S. Residents: This publication has been approved by RBC Capital Markets, LLC (member FINRA, NYSE, SIPC), which is a U.S. registered broker-dealer and which accepts responsibility for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting in a broker or dealer capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, should contact and place orders with RBC Capital Markets, LLC. To Canadian Residents: This publication has been approved by RBC Dominion Securities Inc.(member IIROC). Any Canadian recipient of this report that is not a Designated Institution in Ontario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBC Dominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada. To U.K. Residents: This publication has been approved by RBC Europe Limited ('RBCEL') which is authorized by the Prudential Regulation Authority and regulated by the Financial Conduct Authority ('FCA') and the Prudential Regulation Authority, in connection with its distribution in the United Kingdom. This material is not for general distribution in the United Kingdom to retail clients, as defined under the rules of the FCA. However, targeted distribution may be made to selected retail clients of RBC and its affiliates. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom. To Persons Receiving This Advice in Australia: This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No. 246521). This material has been prepared for general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting on this material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisition or possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that product and consider that document before making any decision about whether to acquire the product. This research report is not for retail investors as defined in section 761G of the Corporations Act. To Hong Kong Residents: This publication is distributed in Hong Kong by RBC Investment Services (Asia) Limited, RBC Investment Management (Asia) Limited and RBC Capital Markets (Hong Kong) Limited, licensed corporations under the Securities and Futures Ordinance or, by the Royal Bank of Canada, Hong Kong Branch, a registered institution under the Securities and Futures Ordinance. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. Hong Kong persons wishing to obtain further information on any of the securities mentioned in this publication should contact RBC Investment Services (Asia) Limited, RBC Investment Management (Asia) Limited, RBC Capital Markets (Hong Kong) Limited or Royal Bank of Canada, Hong Kong Branch at 17/Floor, Cheung Kong Center, 2 Queen's Road Central, Hong Kong (telephone number is 2848-1388). To Singapore Residents: This publication is distributed in Singapore by the Royal Bank of Canada, Singapore Branch and Royal Bank of Canada (Asia) Limited, registered entities granted offshore bank and merchant bank status by the Monetary Authority of Singapore, respectively. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of any recipient. You are advised to seek independent advice from a financial adviser before purchasing any product. If you do not obtain independent advice, you should consider whether the product is suitable for you. Past performance is not indicative of future performance. If you have any questions related to this publication, please contact the Royal Bank of Canada, Singapore Branch or Royal Bank of Canada (Asia) Limited. To Japanese Residents: Unless otherwise exempted by Japanese law, this publication is distributed in Japan by or through RBC Capital Markets (Japan) Ltd., a registered type one financial instruments firm and/or Royal Bank of Canada, Tokyo Branch, a licensed foreign bank. . Registered trademark of Royal Bank of Canada. RBC Capital Markets is a trademark of Royal Bank of Canada. Used under license. Copyright RBC Capital Markets, LLC 2013 - Member SIPC Copyright RBC Dominion Securities Inc. 2013 - Member CIPF Copyright RBC Europe Limited 2013 Copyright Royal Bank of Canada 2013 All rights reserved

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(416) 842-7844; steve.arthur@rbccm.com

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