CAE Inc.

TD CANADIAN SMALL-CAP EQUITY FUND $33.61 (CWA Rating: Aggressive) (TD Asset Management, P.O. Box 7500, Station A, Toronto, Ontario. M5W 1P9. 1-800-463-3863; Web site: www.tdcanadatrust.ca. No load — deal directly with the bank) invests in small to medium-sized companies located in Canada and other countries, that the managers feel offer either superior earnings growth or appear undervalued. It looks for sound companies that stand to benefit as the business and economic environment continues to improve. TD Canadian Small-Cap Equity Fund’s top ten holdings are ING Canada, 3.3%; Gildan Activewear, 2.6%; Industrial Alliance Insurance, 2.3%; Western Oil Sands, 1.8%; Canadian Western Bank, 1.7%; E-L Financial, 1.7%; CAE, 1.6%; Niko Resources, 1.6%; Q9 Networks, 1.5%; and Pason Systems, 1.5%. The $430 million fund is broken down by economic sector as follows: 19.6% in Energy, 16.7% in Basic materials, 16.5% in Financials, 14.0% in Consumer discretionary, 11.9% in Technology, 11.6% in Industrials, 5.7% in Health care, 2.1% in Consumer staples, and 0.5% in Utilities....

ROYAL BANK OF CANADA $57 (Toronto symbol RY) earned $1.14 a share in its first fiscal quarter ended January 31, 2007, up 28.1% from $0.89 a year earlier, thanks to strong gains at both its Canadian and U.S. operations. The bank also raised its quarterly dividend 15%, from $0.40 a share to $0.46. It now yields 3.2%. The current rate is 35% of earnings, which is below Royal’s target of between 40% and 50%, so further hikes seem likely. Buy. CANADIAN PACIFIC RAILWAY LTD. $63 (Toronto symbol CP) has increased its quarterly dividend four times in the past three years. The new annual rate of $0.90 yields 1.4%. The company also increased its latest share repurchase authorization by 10% over 2006. Best Buy. CAE INC. $12 (Toronto symbol CAE) has sold 33 flight simulators to civilian airlines so far in fiscal 2007 (fiscal years end March 31). That’s a 57% gain over the 21 simulators it sold in fiscal 2006. The company’s pilot training business is also in a good position to profit from rising demand for new pilots, particularly in Asia. Buy....

NOVA CHEMICALS CORP. $37 (Toronto symbol NCX; Conservative Growth Portfolio, Manufacturing & Industry sector; Shares outstanding: 82.6 million; Market cap: $3.1 billion; SI Rating: Extra risk) lost $9.46 a share (total $781 million) in the fourth quarter of 2006, mostly due to a $772 million after-tax restructuring charge (all amounts except share price in U.S. dollars). It lost $0.80 a share ($66 million) in the year-earlier quarter. Revenue rose 14.3%, to $1.6 billion from $1.4 billion. Nova is making good progress with its restructuring plan. It has already cut $127 million out of its annual costs, and should save $140 million a year by 2008. Nova Chemicals is a buy....

ANDRES WINES LTD. $34 (Toronto symbol ADW.A; Income Portfolio, Consumer sector; SI Rating: Above average) has gained roughly 10% since it said it would split its stock on a 3-for-1 basis in October 2006. That should greatly improve the stock’s liquidity. Andres also plans to change its name to Andrew Peller Limited. Thanks to strong demand for premium wines, which generate higher profits than its regular brands, Andres increased its dividend for the first time since 1997, from $0.644 a share (pre-split) to $0.759. It now yields 2.2%. Andres Wines is a buy....

CAE INC. $8.65 (Toronto symbol CAE; Conservative Growth Portfolio, Manufacturing & Industry sector; SI Rating: Above average) is a leading maker of full-size, computerized flight simulators. Airlines use these devices to train pilots to fly certain aircraft, and to prepare flight crews to handle emergencies. CAE also makes simulators for military aircraft, including fighter jets and helicopters. In 2001, the company began operating pilot-training facilities, which nicely complements its simulator business. CAE is now the world’s second-largest provider of pilot training services, with 22 facilities on four continents. Demand for these services should grow, since it’s cheaper for airlines to send pilots to CAE’s schools than to train them in-house. CAE gets about half of its revenue from civilian airlines, and half from military organizations. That helps cut its exposure to the highly cyclical air travel industry. Revenue from continuing operations fell from $1.01 billion in 2002 (fiscal years end March 31) to $938.4 million in 2004, mostly due to the drop in air travel after 9/11. Revenue grew to $986.2 million in 2005, and to $1.11 billion in 2006....

When we last featured CAE on our front page in November, 2004, we said the stock could soar as airlines revived following 9/11. CAE went on to rise as much as 80%, even though it faced a couple of major negatives. First, the rise in oil prices strained the budgets of the world’s airlines, who buy the company’s flight simulators. Second, the rise in the Canadian dollar undermined the value of the company’s sales in foreign markets (and foreign customers provide 91% of CAE’s revenues). The stock could remain sluggish, along with the rest of the market, in the next few months. But over the next couple of years and beyond, after the impact of oil prices and the Canadian dollar has run its course, we expect further big gains from CAE....

ROYAL BANK OF CANADA $47 (Toronto symbol RY; SI Rating: Above average) is the first of Canada’s five big banks to sell car and property insurance policies over the Internet; it already offers life and travel policies online. In the past, Royal could only provide rate quotes; prospective clients had to contact Royal’s insurance operations separately to buy. The bank hopes Ottawa will soon let banks sell insurance through branches. That would cut Royal’s costs and boost profits. Royal Bank is a buy....

CAE INC. $9.55 (Toronto symbol CAE; SI Rating: Above average) is thinking about building a new pilot training facility in India. CAE currently has 22 facilities, mainly in North America and Europe. The new training centre would cost CAE about $90 million, or over five times the $17.8 million or $0.07 a share that CAE earned in its first fiscal quarter ended September 30, 2005. India presently has no such facility and sends its pilots to schools in other countries, so this investment would give CAE a first-in advantage over competitors such as Boeing. It should also pay off quickly, since Indian airlines are expanding rapidly, and plan to hire 3,000 new pilots in the five years. CAE could also use the new school to train pilots for India’s air force. CAE is a buy.

CAE INC. $8.90 plans to spend $630 million in the next six years on research aimed at improving its existing flight simulator technology, and to develop simulators for other uses such as emergency response to disasters. Ottawa has agreed to pay for 30% of these costs in exchange for a share of future royalties. Still, that’s a big commitment for CAE, which earned $38.6 million or $0.15 a share from continuing operations in the six months ended September 30, 2005. CAE is a buy. TRANSALTA CORP. $26 earned $0.20 a share before unusual items in the third quarter of 2005, up 17.6% from $0.17 a year earlier, due to fewer unplanned power plant interruptions. Although cash flow per share fell 3.5%, to $0.82 from $0.85, it’s still enough to cover the company’s capital expenditures and $1.00 dividend, which yields 3.8%. TransAlta is a buy. IGM FINANCIAL INC. $45 continues to gain from improving equity markets and mutual fund sales. Assets under administration in November 2005 grew 10.2%, to $91.6 billion from $83.1 billion at the end of 2004. That’s good news, since IGM bases its fees on the value of the assets in its custody. IGM Financial is a buy.