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Héroux-Devtek could reward shareholders with big payout

Aircraft landing-gear maker Héroux-Devtek Inc. is poised to make shareholders very happy, at least according to one analyst.

The company, whose shares closed Wednesday at $12.50, is sitting on a pile of cash equal to almost half its share price, a hoard arising from the proceeds of a recent divestiture. National Bank Financial analyst Cameron Doerksen says that Héroux is about to return a big portion of this money to shareholders in the form of a special dividend.

He estimates the company has $176-million, or $5.70 a share on hand. "It is our expectation that the majority of this cash will be paid out," he said in a report, forecasting that the payment could be announced by mid-fall.

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When speculation occurs that a company could distribute a dividend equal to a substantial fraction of its share price, it attracts attention. That's been the case with Héroux, the world's third-largest landing-gear maker and service provider.

Interest in the payout, and in the prospects for Quebec-based Héroux, have been rising since Mr. Doerksen's report began circulating in the investment community on Tuesday.

The report has been a major factor contributing to the recent pop in the price of the shares. Mr. Doerksen believes the company is reviewing possible acquisitions in the landing-gear business and will make a decision on a payout once it determines the amount it may require for a takeover.

Héroux is in the happy position of having money to distribute following the sale of a division that made the ribs and other structural parts for planes, the less glamorous part of its business mix. The sale fetched about 11 times a measure of cash flow known as EBITDA, or earnings before interest, taxes, depreciation and amortization.

Before the announcement of the sale, Héroux was trading for less than $8 a share, but the deal highlighted for investors the value imbedded in the company.

Landing gear is a more premium, specialized business with less competition, so it is somewhat surprising that the market is valuing Héroux at only four times Mr. Doerksen's estimate of its fiscal 2014 EBITDA, its next full operating year given that its fiscal year end is March 31. The company's valuation is "still very compelling," he says.

In his view, the price the market is putting on Héroux is "nowhere near reflecting the true value of the business. Indeed, based on other transactions in the aerospace industry, it is our view that the landing-gear operation could fetch a valuation of [eight or even more times] EBITDA if it were to be sold today," he says.

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At that valuation, Héroux would be worth about $18 a share, although Mr. Doerksen has a more conservative target of $15.50 a share.

There are knocks against the company. For instance, nearly 60 per cent of its sales are military related, and they could suffer from government cutbacks.

Héroux, though, derives a substantial portion of its defence revenues through the relatively stable repair, parts and overhaul end of the business. And its civilian business is poised to grow more rapidly because the company is the supplier for three new business jets.

Mr. Doerksen says Héroux isn't currently on the auction block, but the company, whose capitalization is only about $350-million, may put itself up for sale if its valuation doesn't improve soon.

Other analysts believe the company is a takeover candidate. Raymond James said in a report that Héroux, as a pure play in the landing-gear business, "could be an attractive strategic asset in a consolidating industry" given that United Technologies recently acquired Goodrich for about 11 times EBITDA.

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About the Author
Investment Reporter

Martin Mittelstaedt has had a varied reporting career at the Globe and Mail, covering politics, the environment and business. He opened up the Globe's New York bureau for the Report on Business, and has also been on the banking and capital markets beats. He's written extensively on investing themes. More

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