MDA TDSecurities

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July 31, 2014Action Notes Equity Research 1 of 6

Company ProfileMDA sells satellite and advancedtechnology solutions in the surveillance andcommunications markets. Its customersinclude global satellite operators,government entities, and other corporateclients. The company is headquartered inRichmond, B.C., and operates 11 offices in

Canada, the U.S., and internationally2011 2012 2013 2014

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MDA- T: P rice

Please see the final pages ofthis document for important

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MacDonald, Dettwiler and Associates Ltd.(MDA-T) C$82.41

Strong Q2 Revenue and Bookings; Mixed Outlook

EventRevenue was well ahead of expectations. EBITDA and EPS were just aheadof the Street with lower margins, higher taxes, and corporate expensesBook/bill was 130%+. We maintain our HOLD rating and $90.00 target

price.

Impact: NEUTRAL

The SSL business is showing positive top-line momentum... Thisdivision generated the revenue upside in the quarter and five satellitecontract announcements drove the strong overall book/bill. Managemen

spoke to an active pipeline with six more bid decisions expected in thecoming months.

but pricing pressure remains a concern. The communicationsbusiness margins continue to decline gradually, which was attributedpartially to increased competition. Management has initiatives in placeto improve efficiency over the medium term.

Other headwinds that could affect H2 results. The ongoing ViaSalitigation, force majeure on the Ukrainian satellite project, andgovernment sanctions on Russia present headwinds to growth.

The Surveillance/Intelligence business is a positive offset, butgrowth is tough to forecast. This business continues its steady

performance on the back of RCM, Australia UAV, and the geospatiabusiness. MDA has recently secured toehold positions in severa

interesting growth areas (i.e., hosted payloads, asteroid redirect)however, meaningful revenue contracts in these areas will not hit the

pipeline until 2015, at the earliest.

Our EBITDA estimates are unchanged. The net impact of our revisedmodel assumptions is neutral to EBITDA; however, our EPS forecast islower on a higher anticipated tax rate.

Commentary seemed more cautious on the potential for anotherlarge acquisition. MDA said that there are very few large potentialtargets out there and the company remains focussed on organic growthand tuck-ins that give access to new areas. Very little new detail was

provided on the recent unnamed acquisition announcement.

TD Investment ConclusionWe maintain our HOLD rating and $90.00 target price. We continue toapply 10x EV/forward EBITDA for our target price. This is in line with therecent 10x median and equates to 15x 2015E EPS. Peer valuations are about8x FTM EBITDA. We believe that MDA does deserve a premium valuation

Technology

Recommendation: HOLD

Unchanged

Risk: MEDIUM

12-Month Target Price: C$90.00

Unchanged12-Month Dividend (Est.): C$1.30

12-Month Total Return: 10.8%

Market Data (C$)Current Price $82.41

52-Wk Range $74.66-$91.20

Mkt Cap (f.d.)($mm) $2,975.0

EV ($mm) $3,606.0

Current Dividend $1.30

Dividend Yield 1.6%

Avg. Daily Trading Vol. (3M-All Exch) 39,984Financial Data (C$)

Fiscal Y-E December

Shares O/S (f.d.)(mm) 36.1

Float Shares (mm) 36.1

Net Cash/Shr (f.d.) --

Net Debt ($mm) $618.7

Net Debt/Tot Cap 41.0%Estimates (C$)

Year 2012A 2013A 2014E 2015E

Sales ($mm) 879.9 1,819.0 2,082.6 2,190.7

Sales (old)($mm) -- -- 2,016.3 2,110.7

EBITDA ($mm) 201.7 314.1 334.6 355.2

EBITDA (old)($mm) -- -- 335.4 354.2

EPS (f.d.) 3.98 5.13 5.60 6.12

EPS (f.d.)(old) -- -- 5.82 6.29

EPS (f.d.) Quarterly Estimates (C$)Year 2012A 2013A 2014E 2015E

Q1 0.92A 1.30A 1.37A 1.53E

Q2 0.91A 1.20A 1.43A 1.53EQ3 0.89A 1.29A 1.41E 1.53E

Q4 1.27A 1.34A 1.39E 1.53E

ValuationsYear 2012A 2013A 2014E 2015E

EV/Sales 4.1x 2.0x 1.7x 1.6x

EV/EBITDA 17.9x 11.5x 10.8x 10.2x

P/E (f.d.) 20.7x 16.1x 14.7x 13.5x

All figures in C$, unless otherwise specified.

Scott Penner, CFA Doug Taylor, CFA416 308 3406 416 983 [email protected] [email protected]


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based on its higher margin profile and the option value of new potential areas of business.Details

Exhibit 1. Earnings Summary

Communications 391.2 350.0 41.2 17% 14% 5 new commercial satellite awards were secured since Q1 results

Surveillance and Intelligence 123.9 115.4 8.5 51% 8%

Geospatial Services 37.5 42.5 (5.0) 9% 1% $35-40mm as per management

Total Revenue 552.7 507.9 44.8 503.0 23% 12% Long-term target is for high-single digits to low-teens organic growth

EBITDA ($mm) 85.5 84.0 1.5 85.1 9% 3% Margin lower due to a higher mix of commercial satellite and increased competition

Margin (%) 15.5% 16.5%

Adjusted EPS ($) $1.43 $1.48 ($0.06) $1.40 18% 4%

Backlog 3,000 -2% 8% Did not provide backlog broken down by segment this quarter

Implied Bookings 768

Book/Bill 139%

Source: Company reports, TD Securities estimates, Capital IQ consensus.

CommentsGrowth

q/q

Q2/14AVariance

($mm)

TD Ests.Growth

y/y

Consensus

Communications (71% of Revenue): Strong Revenue and Bookings; Lower Margins. Revenue upside wasa result of higher activity levels on satellite construction programs. Commercial satellite awards YTD are five

(representing a consistent 30% win rate per management), which contributed to the $700mm$800mm inbookings this quarter (130%+ book/bill). The SSL business looks to be on track for an up year vs. 2013Bidding activity is said to remain very high with a $2bln+ pipeline and six bids awaiting announcement in thecoming weeks/months. The market was also described as highly competitive. This is affecting margins (Q2EBITDA margins were 11.8% vs. 12.2% in Q1 and 13.6% in 2013). We have increased our SSL revenueassumption, given strong bookings and expected expansion to facilities to accommodate higher throughputHowever, we model limited margin expansion through 2015.

The Communications Business Does Face Some Growth Headwinds.The ongoing ViaSat litigation (nexthearing is August 7) could lead to an injunction, preventing MDA from using certain technologies. Thecompany said it has workaround solutions that are cost neutral for affected projects; however, new bookingscould be affected by customers fearing the injunction. The companys non-SSL business could be affected inH2 because of the force majeure on the Ukrainian satellite ($50mm of revenue delayed). There is also arguably

a lower prospect of additional Russian satellite work to backfill the nearly completed AM6 project owing togovernment sanctions (this impact could be about $50mm/year in revenue).

Surveillance/Intelligence (29% of Revenue): Revenue and Margins In line with our Expectations.Thissegment continues its steady performance with RCM fully ramped ($40mm/quarter), stable geospatial business($35mm$40mm/quarter) and Australian UAV work continuing to be extended (about $15mm/quarter). MDAannounced initial contracts in several growth areas, including NASAs asteroid redirect mission and DARPAshosted payload solution. Timing on related growth from these opportunities is uncertain management saidlarger related bookings could affect the 2015 pipeline and are already contemplated in our projected growth

Very Few New Details Provided on the Recent Unnamed Acquisition. Recall that earlier this month MDAannounced an agreement to acquire a $40mm/revenue year business, which provides radar and other

information sensors for U.S. national security. The deal is expected to close in mid-Q4 and MDA withheld anyadditional information on the purchase price beyond that it is not material. Management added that thisbusiness currently has 10% margins, but the company hopes to grow both revenue and margins over time toresemble its geospatial business (we estimate 35% margins).

MDA Seemed to be More Cautious on the Potential for Additional, Larger M&A. When asked about thepipeline of larger deals, management said that there are very few targets, and for the time being it is focussingon the organic business. Potential tuck-in deals could provide access to new markets (i.e., Brazil). We believethat commentary suggests a lower probability of another game-changing acquisition (such as SSL) than at this

point last quarter.


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OutlookThe net impact of our changes increases our revenue expectations, but is EBITDA-neutral. Our EPS forecastdeclines on higher projected taxes than management had previously forecasted (now low-20s vs. our 20%earlier assumption).

Exhibit 2. Estimate Changes

2014E 2015E

Current Prior % Chg. Current Prior % Chg. Current Prior % Chg. Growth % Growth %

SS/L $325.0 $300.0 8% $1,305.5 $1,204.2 8% $1,300.0 $1,200.0 8% 20% 0%

MDA Communications $40.0 $50.0 -20% $160.0 $190.0 -16% $200.0 $240.0 -17% -35% 25%

Total Communications $365.0 $350.0 4% $1,465.5 $1,394.2 5% $1,500.0 $1,440.0 4% 10% 2%

Surveillance/Intelligence $116.2 $115.4 1% $465.6 $460.6 1% $530.7 $490.7 8% 39% 14%

Geospatial $40.0 $42.5 -6% $151.5 $161.5 -6% $160.0 $180.0 -11% 2% 6%

Total Surveillance/Intel. $156.2 $157.9 -1% $617.1 $622.1 -1% $690.7 $670.7 3% 27% 12%

Total Revenue $521.2 $507.9 3% $2,082.6 $2,016.3 3% $2,190.7 $2,110.7 4% 137% 5%

Street Consensus $506.1 $2,011.4 $2,168.3

EBITDA $83.3 $84.0 -1% $334.6 $335.4 0% $355.2 $354.2 0% 66% 6%

Street Consensus $87.5 $347.4 $385.5

FD EPS $1.41 $1.48 -5% $5.60 $5.82 -4% $6.12 $6.29 -3% 106% 9%

Street Consensus $1.43 $5.68 $6.48

1EBITDA as we define it is based on MDA's "operating" EBITDA less corporate expense allocations. Consensus likely reflects a variety of definitions.

Source: TD Securities estimates, Capital IQ consensus.

Q3/14E 2014E 2015E

ValuationCurrently, MDA trades at EV/forward EBITDA of 10.5x using our estimates (10.3x using consensus). The

peer group trades at a median 8x forward EBITDA. We believe that this premium is justified by highermargins at MDA. On EV, the stock is a 78% FCF yield using our estimates for 2014 or 2015.

Exhibit 3. Historical Valuation EV/Forward EBITDA (Using Consensus Estimates)

Source: CapitalIQ

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MDA:3-Yr Median: 8.1x (1-yr median is 10.4x which may better capture SSL)Normalized Low: 6xNormalized High: 11xCurrent: 10.3x

Justification of Target PriceOur $90.00 target price (unchanged) is based on 10x forward EBITDA one year out. This would be in linewith its recent (post SSL) valuation, and would equate to 16x 2014E EPS and 15x 2015E.


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Key Risks to Target PriceKey risks to target price include the following: 1) Risks associated with acquisitions, which continue to be anelement of MDAs growth strategy; 2) the Systems business is partially dependent on government budgets forsatellites and space exploration that can be volatile; 3) potential for cost over-runs on fixed price contracts,and; 4) industry competition/market share.


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TD Securities Equity Research Disclosures

Company Ticker Disclosures

MacDonald, Dettwiler and AssociatesLtd.

MDA-T n/a

1. TD Securities Inc., TD Securities (USA) LLC or an affiliated company has managed or co-managed a public offering of securities within the last 12months with respect to the subject company.

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Additional Important Disclosures

Price GraphsFull disclosures for all companies covered by TD Securities can be viewed at https://www.tdsresearch.com/equities/welcome.important.disclosure.actionby TD Securities' institutional equity clients.

Distribution of Research Ratings

^ Percentage of subject companies under each rating

categoryBUY (covering ActionList BUY, BUY and Spec.

BUY ratings), HOLD and REDUCE (covering TENDERand REDUCE ratings).

* Percentage of subject companies within eachof thethree

categories (BUY, HOLD and REDUCE) for which TD

Securities Inc. has provided investment banking serviceswithin the last 12 months.

Current as of July 3, 2014

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BUY HOLD REDUCE

Investment Banking Services Provided*

BUY

58%

HOLD

39%

REDUCE

3%

Distribut ion of Research Ratings^

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Research RatingsACTION LIST BUY: The stock's total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next 12 months and it is a toppick in the Analyst's sector.BUY: The stocks total return is expected to exceed a minimum of 15%, on a risk-adjusted basis, over the next 12 months.SPECULATIVE BUY: The stock's total return is expected to exceed 30% over the next 12 months; however, there is material event risk associated withthe investment that could result in significant loss.HOLD: The stocks total return is expected to be between 0% and 15%, on a risk-adjusted basis, over the next 12 months.

TENDER: Investors are advised to tender their shares to a specific offer for the company's securities or to support a proposed combination reflecting ouview that a superior offer is not forthcoming.REDUCE: The stocks total return is expected to be negative over the next 12 months.

Overall Risk Rating in order of increasing risk:Low (6% of coverage universe), Medium (34%), High (50%), Speculative (10%)

Analyst CertificationEach analyst of TD Securities Inc. whose name appears on page 1 of this research report hereby certifies that (i) the recommendations and opinionsexpressed in the research report accurately reflect the research analyst's personal views about any and all of the securities or issuers discussed hereinthat are within the analysts coverage universe and (ii) no part of the research analyst's compensation was, is, or will be, directly or indirectly, related tothe provision of specific recommendations or views expressed by the research analyst in the research report.

DisclaimerThis report is produced entirely by TD Securities Inc. Although the information contained in this report has been obtained from sources that TDSecurities Inc. believes to be reliable, we do not guarantee its accuracy, and as such, the information may be incomplete or condensed. All opinionsestimates and other information included in this report constitute our judgment as of the date hereof and are subject to change without notice. TD

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