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Héroux-Devtek shares surge to record on special dividend

A worker works at on Landing gear without wheels at the Héroux-Devtek plant in Quebec.


Héroux-Devtek's shares hit an all-time high Friday after the aircraft equipment maker announced a special cash distribution that will net its CEO nearly $19-million.

The shares (TSX:HRX) closed up 36 cents, or 2.75 per cent, at $13.49 on the Toronto Stock Exchange after having reached an intraday high of $13.99.

"I think what we announced this morning for the shareholders is well perceived by the market," chief executive Gilles Labbe said during a conference call.

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Labbe is Héroux-Devtek's fourth-largest investor, holding 3.79 million shares or 12 per cent of the company, according to Thomson Reuters.

Dean Knight Capital stands to receive $24.5-million from the special payout as the largest shareholder, while the Caisse will receive some $21-million for its 4.2 million shares.

Héroux-Devtek will pay a special cash distribution of $5 per share or $160-million to its 32 million shareholders next month. The money comes from the Montreal-area company's sale of a large portion of its operations at the end of August in order to focus on its landing-gear business.

A special meeting will be held Dec. 18 to approve the distribution, which would be paid the following day to shareholders of record Nov. 20. It will consist of $2.70 per share consisting of a partial reduction and repayment of the corporation issued capital, and $2.30 per share in dividend.

The move will exempt shareholders from tax on the $2.70 per share portion. If the proposal is rejected, however, a $5 dividend will be paid.

"The board determined that this distribution level will allow shareholders to realize significant value as well as an adequate return on their investment while enabling Héroux-Devtek to maintain a solid financial position...and the flexibility to proceed with strategic acquisitions," Labbe told analysts.

Cameron Doerksen of National Bank Financial said the special dividend is in line with his forecasts of $5.70 and is consistent with the level that management had been suggesting.

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He lowered his rating to sector perform and cut his target price by 50 cents as shares have appreciated 31 per cent since July. His new target is $15 including $10 for the business and $5 for the dividend.

"Notwithstanding our rating downgrade, we see potential longer-term upside for the stock should the company execute on a strategic acquisition or win new contracts, both of which we believe are strong possibilities," he wrote in a report.

Héroux-Devtek also announced $2.7-million of net income from continuing operations, or nine cents per share for the third quarter.

Revenue from continuing operations was $57.7-million, up from $55.5-million.

The company's discontinued operations brought total profit in the third quarter to $112.7-million, or $3.64 per share.

That's up from $4.8-million or 16 cents per share a year earlier, before the company sold manufacturing plants in Dorval, Que., Mexico and Texas.

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"Our landing gear operations had a solid quarter, driven by the strength of the commercial aerospace market, more particularly the large commercial aircraft and business jet segments," Labbe added.

Héroux-Devtek said new aircraft orders and solid backlogs at Boeing and Airbus leave it well positioned. Boeing alone announced last month a 20 per cent increase in its production of large aircraft.

Business jet shipments increased 13.1 per cent in the first half of the year and industry observers expect the segment's recovery will accelerate in 2013 and be sustained for about five years. That period should coincide with the ramp up of Heroux's work on several programs including Legacy, Bombardier Learjet 85 and Dassault aircraft.

The military segment continues to be affected by uncertainty over government budget cuts.

"Still, we are well positioned in this market given our extensive diversification with regards to programs and our balance between new components, manufacturing and aftermarket products." Labbe said.

Civil aerospace accounts for 42 per cent of its total sales, while military represents 58 per cent. Over the next three to five years that is expected to flip to more than 55 per cent commercial and 45 per cent military.

Following the special distribution, Héroux-Devtek will have $131-million of cash and at least $128-million of available credit, enabling it to fund strategic acquisitions or new program wins that observers believe could be catalysts for its stock.

Doerksen said there also remains a potential for Héroux-Devtek to be sold because of its relatively low valuation.

"Although we do not believe that management is actively seeking to sell the company, if the valuation were to remain relatively low for an extended period, we suspect that the company could attract interest from another industry player or the board itself may seek to realize value in much the same manner is it did with the sale of the aerostructure and industrial divisions," he added.

The company has kept its landing gear product line and eight locations in Quebec, Ontario and Ohio.

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