TSX:ATS - Post Discussion
Post by
retiredcf on Nov 10, 2022 9:39am
RBC 2
Current and upside scenario targets are $54.00 and $68.00. GLTA
November 9, 2022
ATS Automation Tooling Systems
Looking for continued growth through F2023
Our view: ATS Automation Tooling Systems Inc. ("ATS") reported Q2/ F23 earnings in line with RBC forecasts but slightly below consensus estimates. Looking ahead, we believe the company remains well positioned to deliver on its record backlog and expect margins to improve over the coming quarters as the company executes on its larger EV orders (better margins expected as these projects ramp-up) and as it cycles through some commodity headwinds. In our view, the company remains well positioned with a solid demand pipeline across its end-markets and steady execution on its projects. Revising PT -$1, reiterate Outperform.
Key points:
Thoughts exiting Q2 reporting – While Q2 results were just shy of consensus Adjusted EBITDA forecasts, the share price reaction today is more likely reflective of the Street re-calibrating near-term expectations around revenue/margin flow through from recently announced "larger" EV orders, and some margin impact from higher commodity prices (both of which we view as transitory/temporary factors). We discuss in further detail below, but the margin contribution from larger orders/projects appears to be a timing issue, in our view, with margins likely to improve as the company ramps up work and increases revenue/associated margins flow through. The broader supply chain headwinds/commodity price increases have also led to higher costs (i.e., for components), and while the company has implemented pricing there has still been some impact on margins. We expect the commodity-related cost pressures (which have impacted the equipment/OEM part of ATS' business) to also subside to some extent through H1 calendar 2023. Overall, the outlook across the company's business lines remains supportive, with outlook commentary for the major end-markets ranging from "stable" to "strong".
Some colour on flow-through of revenue/margins from EV orders – Over the recent weeks/months, ATS has announced a number of large EV orders that are 18-24 months in duration vs. 9-10 months for a typical ATS project. Given the longer duration, ATS is guiding to 32%-27% consolidated backlog conversion in Q3/F23 (below the typical 35%-40% range and implying revenue of between $574MM-$663MM next quarter). We believe this is reflective of the revenue phasing of these projects, with the contribution cadence from the larger projects akin to a bell curve, in our view (i.e., with most revenue recognized through the “middle portion” of project's life). We expect backlog conversion to normalize over the medium-term.
Balance sheet and capital allocation – ATS' leverage exiting Q2/F23 was 3.2x (+0.4x QoQ; +1.7x YoY). The increase largely reflected W/C investments to deliver on ATS' record backlog. The company currently has access to ~$227MM of liquidity ($95MM of cash and $132MM of additional liquidity through credit facilities). Looking ahead, we expect M&A will remain the priority for capital allocation (particularly as the balance sheet improves), followed by internal investments (W/C and capex).
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