Title: Macdonald, Dettwiler and Associates Ltd. - MDA (TSX) $48.30 Price: $48.30 StockRating: Outperform TargetPrice: $63.00 Headline: Stock Sell-Off Overdone: Risk/Reward Profile Now Looks Very

July 31, 2014 The NBF Daily Bulletin Aerospace & Defence

MacDonald, Dettwiler and Associates Ltd.

MDA (TSX) $81.48 Stock Rating: Sector Perform

(Was Outperform)

Target: $90.00 (Was $95.00)

Risk Rating: Above Average

Q2 2014 results; Moving to SP

Record revenue on back of strong satellite contracts offset by lower margins

(Unchanged)

Est. Total Return (Inc. dividend) 12%

HIGHLIGHTS Stock Data:

52-week High-Low (Canada) $91.20 - $74.66

Bloomberg/Reuters: Canada MDA CN / MDA.TO

(Year-End Dec 31) 2012A 2013A 2014E 2015E

Revenue (mln) $880 $1 819 $2 054 $2 174

EBITDA (mln) $202 $314 $340 $377

Adjusted EPS $3.91 $5.14 $5.65 $6.29

CFO (mln) $147 $152 $163 $307

FCF (mln) $141 $113 $121 $268

FCF/share $4.44 $3.22 $3.36 $7.43

Dividend/share $1.30 $1.30 $1.30 $1.30

Dividend (mln) $41 $44 $47 $47

Valuation

EV/Sales 4.1x 2.0x 1.7x 1.6x

EV/EBITDA 17.7x 11.4x 10.5x 9.5x

P/E - Adjusted 20.9x 15.9x 14.4x 12.9x

P/FCF 20.8x 26.1x 24.3x 11.0x

Financial Data:

Shares outstanding - Basic / FD (mln) 36.1 / 36.1

Annual Dividend $1.30

Market Capitalization (mln) $2 940

Enterprise Value (mln) $3 571

Cash (mln) $27

Debt (mln) $658

Net Cash (Debt)/Share ($17.48)

Industry Rating: Market Weight (NBF Economics & Strategy Group)

Revenue beats due to higher activity levels and FX tailwinds. Revenue was $553 mln (consensus $500 mln), up 23% y/y. Communications segment revenue was $391 mln, up 17% y/y, due mainly to high levels of commercial satellite programs. Surveillance & Intelligence revenue was $161 mln, up 39% y/y, due to RADARSAT Constellation Mission and space robotics programs. FX added ~$25-30 mln in revenue.

Slight EPS beat as pricing pressure lowers margin. EPS was $1.43/sh vs. consensus $1.40/sh. Reported EBITDA margin was 16.4% vs. 17.3% last quarter. Communications EBITDA margin was 11.8% as commercial satellite construction contracts composed a bulk of the revenue mix (lower margin and high flow-through cost in the quarter). MDA is seeing increased activity in the commercial satellite segment, however increased competition continues to pressure pricing downward on new procurements.

MDA is winning more than its fair share of new satellite orders. On July 1, MDA announced another SSL win with Spanish satellite operator HISPASAT Group for the fifth satellite booking year-to-date. Order backlog is $3 billion (up $2.8 bln q/q) as MDA has won a little over 30% of commercial satellite awards YTD. The Russian political environment may result in MDA foregoing ~$50 mln/year in revenue.

MDA does not expect ViaSat litigation to impact 2014 results. The next hearing is Aug. 7th. MDA has incurred $2.5 mln in legal costs YTD. We are concerned that this process drags on longer than expected resulting in some potential satellite award losses from customer hesitation.

U.S. national security radar related acquisition expected to close in Q4. ~$40 mln in annual revenue and 170 employees will be on-boarded with this deal. Management expects this to drive higher-margin, organic growth.

Rating moves to Sector Perform; target to $90/share (~14.3x 2015E EPS) on potential margin contraction. More M&A and organic growth initiatives offer upside to estimates.

Stock Performance (Source: Thomson ONE, NBF) Company Profile: MDA is based in Richmond, BC & provides ground, air & space based information solutions to customers globally. Solutions include, space-based platforms for Earth observation & advanced solutions for space exploration missions & mission sub-systems and support services, Earth observation ground systems, defence information systems, airborne surveillance systems, transportation management systems. MDA completed the transformative SSL acquisition in Nov/12, becoming a major player in the commercial communication satellite space. Kris Thompson, MBA – (416) 869-8049 kris.thompson@nbc.ca Auritro Kundu, MBA – (416) 869-7495 kris.thompson@nbc.ca

Steven Walt – (416) 869-7938 steven.walt@nbc.ca

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Q2 results summary and NBF estimate revisions Exhibit 1: Q2 revenue beats; margins under pressure from competitive pricing environment(C$ mln except EPS) Consensus NBF Delta Y/Y Sequential

Q2/14E Q2/14E Q2/14A Q2/13A Growth Q1/14A Growth

Backlog NA NA $3 000 $3 000 0.0% $2 800 7.1%

RevenueCommunications $348 $391 12.5% $334 17.1% $344 13.7%Surveillance and intelligence $151 $161 7.2% $116 38.8% $148 8.8%

Total $500 $498 $553 10.9% $450 22.7% $493 12.2%

EBITDA (reported)Communications $45 $46 3.3% $48 -3.4% $42 9.7%Surveillance and intelligence $42 $44 5.4% $34 32.2% $43 3.0%

Total EBITDA $87 $87 $91 4.3% $81 11.3% $85 6.3%Less corporate expenses ($2) ($5) ($3) ($2)Adjusted EBITDA $85 $85 0.5% $79 8.8% $83 2.5%

Margin 17.4% 17.1% 15.5% 17.4% 16.9%

EBITDA margin (reported)Communications 12.9% 11.8% 14.3% 12.2%Surveillance and intelligence 28.0% 27.5% 28.9% 29.1%

Total 17.4% 16.4% 18.1% 17.3%

EPS - IFRS $1.21 $1.01 -16.6% $0.86 16.9% $0.69 46.1%EPS - Adjusted $1.40 $1.39 $1.43 2.7% $1.20 18.6% $1.37 4.3%

Source: Company reports, Bloomberg, Thomson Reuters, NBF Exhibit 2: New estimates by reported segment

2014E 2015ENew New

RevenueCommunications $1 414 $1 475Surveillance and intelligence $640 $699Total Revenue $2 054 $2 174

EBITDA (reported)Communications $171 $188Surveillance and intelligence $183 $201Total EBITDA $354 $389Less corporate expenses ($14) ($12)Adjusted EBITDA $340 $377 Margin 16.6% 17.3%

EPS - Adjusted $5.65 $6.29Source: Company reports, NBF Exhibit 3: Commercially awarded communications satellite trends improving

Source: Company reports, NBF

SSL

SSL SSL SSL

SSL

SSL

SSL

Boeing

Boeing

Boeing

BoeingBoeing

BoeingOrbital

Orbital

Thales

Thales

Thales

Astrium

Astrium

Astrium

Astrium

Astrium

Astrium

Others

0

2

4

6

8

10

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Q1/1

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Q2/1

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Q3/1

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Q4/1

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SSL Boeing Orbital Thales Astrium Others

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Thales

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Exhibit 4: Revenue by segment

Source: Company reports, NBF

0

100

200

300

400

500

600

Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14

Rev

enue

($

mln

)

CommunicationsSurveillance and intelligence

Exhibit 5: Reported EBITDA by segment and margins

Source: Company reports, NBF

0%

5%

10%

15%

20%

25%

30%

35%

0

10

20

30

40

50

60

70

80

90

100

Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14

EB

ITD

A (

$ m

ln)

Communications

Surveillance and intelligence

EBITDA margin

Exhibit 6: Revenue by geography

Source: Company reports, NBF

0

100

200

300

400

500

600

Q1/12 Q2/12 Q3/12 Q4/12 Q1/13 Q2/13 Q3/13 Q4/13 Q1/14 Q2/14

Rev

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e ($

mln

)

Other

Brazil/South America

Asia

Australia

Europe

U.S.

Canada

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MDA EARNINGS MODEL - FISCAL YEAR END: DECEMBER ($ 000)

Dec-12 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Dec-15F2012 F2013 Q1/14 Q2/14 Q3/14E Q4/14E F2014E Q1/15E Q2/15E Q3/15E Q4/15E F2015E

RevenueCommunications 386 584 1 334 604 344 209 391 246 344 296 333 968 1 413 719 347 326 361 219 375 668 390 695 1 474 909 % of revenue 44% 73% 70% 71% 68% 67% 69% 67% 68% 68% 68% 68% y/y growth % 245% 4% 17% 2% 0% 6% 1% -8% 9% 17% 4%

Surveillance and intelligence 493 345 484 380 148 356 161 431 163 852 166 310 639 950 169 636 173 029 176 490 180 020 699 175 % of revenue 56% 27% 30% 29% 32% 33% 31% 33% 32% 32% 32% 32% y/y growth % -2% 51% 39% 30% 16% 32% 14% 7% 8% 8% 9%

Total revenue 879 929 1 818 984 492 565 552 677 508 149 500 278 2 053 669 516 963 534 249 552 158 570 714 2 174 084 y/y growth % 16% 107% 15% 23% 10% 5% 13% 5% -3% 9% 14% 6%

Total direct costs 679 332 1 505 313 409 826 467 694 424 595 416 981 1 719 096 430 298 444 410 459 003 474 092 1 807 803 y/y growth % 17% 122% 18% 26% 9% 5% 14% 5% -5% 8% 14% 5%

Segment profitCommunications 65 638 142 820 31 650 35 800 31 504 30 559 129 513 32 996 35 219 37 567 40 046 145 828 % of revenue 17% 11% 9% 9% 9% 9% 9% 10% 10% 10% 10% 10% y/y growth % 118% -25% 26% 20% -34% -9% 4% -2% 19% 31% 13%

Surveillance and intelligence 129 798 136 442 41 737 43 012 45 879 46 567 177 195 47 498 48 448 49 417 50 405 195 769 % of revenue 26% 28% 28% 27% 28% 28% 28% 28% 28% 28% 28% 28% y/y growth % 5% 46% 39% 52% 0% 30% 14% 13% 8% 8% 10%

Total profit 195 436 279 262 73 387 78 812 77 383 77 126 306 707 80 494 83 667 86 984 90 452 341 597 % of revenue 22% 15% 15% 14% 15% 15% 15% 16% 16% 16% 16% 16% y/y growth % 43% 4% 33% 37% -17% 10% 10% 6% 12% 17% 11%

Reported EBITDACommunications 76 126 181 853 42 146 46 235 41 939 40 994 171 314 43 431 45 654 48 002 50 481 187 568 % of revenue 20% 14% 12% 12% 12% 12% 12% 13% 13% 13% 13% 13% y/y growth % 139% -18% -3% -5% -1% -6% 3% -1% 14% 23% 9%

Surveillance and intelligence 138 319 143 519 43 154 44 444 47 311 47 999 182 908 48 930 49 880 50 849 51 837 201 497 % of revenue 28% 30% 29% 28% 29% 29% 29% 29% 29% 29% 29% 29% y/y growth % 4% 42% 32% 48% -1% 27% 13% 12% 7% 8% 10%

Total EBITDA 214 445 325 372 85 300 90 679 89 250 88 993 354 221 92 361 95 534 98 851 102 319 389 065 % of revenue 24% 18% 17% 16% 18% 18% 17% 18% 18% 18% 18% 18% y/y growth % 52% 5% 11% 17% -1% 9% 8% 5% 11% 15% 10%

Adjusted EBITDA (after corp expense) 201 745 314 072 83 400 85 479 85 250 85 993 340 121 89 361 92 534 95 851 99 319 377 065 % of revenue 23% 17% 17% 15% 17% 17% 17% 17% 17% 17% 17% 17% y/y growth % 56% 5% 9% 17% -1% 8% 7% 8% 12% 15% 11%

Dividend per share $1.30 $1.30 $0.65 $0.00 $0.65 $0.00 $1.30 $0.65 $0.00 $0.65 $0.00 $1.30Dividend $ 41 378 44 283 23 444 - 23 461 - 46 905 23 480 - 23 500 - 46 980

Net income - adjusted 124 371 180 083 49 357 51 477 51 718 51 389 203 941 53 597 55 896 57 945 60 092 227 530

Adjusted EPS - Basic $3.91 $5.14 $1.37 $1.43 $1.43 $1.42 $5.65 $1.48 $1.55 $1.60 $1.66 $6.29 y/y growth % 31% 31% 5% 19% 11% 6% 10% 8% 8% 12% 17% 11%

Adjusted EPS - Diluted $3.91 $5.14 $1.37 $1.43 $1.43 $1.42 $5.65 $1.48 $1.55 $1.60 $1.66 $6.29 y/y growth % 31% 31% 5% 19% 11% 6% 10% 8% 8% 12% 17% 11%

Weighted avg. shares outstanding - Basic 31 835 35 063 36 068 36 082 36 094 36 109 36 088 36 124 36 139 36 154 36 169 36 146 Weighted avg. shares outstanding - Diluted 31 835 35 063 36 068 36 082 36 094 36 109 36 088 36 124 36 139 36 154 36 169 36 146

Total shares outstanding - Basic 31 859 36 056 36 073 36 086 36 101 36 116 36 116 36 131 36 146 36 161 36 176 36 176 Total shares outstanding - Diluted 31 859 36 056 36 073 36 086 36 101 36 116 36 116 36 131 36 146 36 161 36 176 36 176

Source: NBF, Company reports