ATS Corp T.ATS

RBC

[retiredcf]

Their upside scenario target also remains $71.00. GLTA

February 7, 2024

Outperform

TSX: ATS; CAD 58.41; NYSE: ATS

ATS Corporation Continuing to execute

Our view: We maintain our positive view on ATS Corporation ("ATS") following FQ3 results that were ahead of Street forecasts. While we expect the EV related timing shift to be a modest headwind in the near-term, it does not impact the medium- to long-term opportunity associated with the EV production build-out. Reiterate $65 PT and OP.

Key points:

Thoughts exiting Q3/F24 – ATS reported FQ3 results that were ahead of Street forecasts, while bookings were largely in line with our expectations. The investor focus earlier in the day (and for much of the Q&A on the earnings call), however, was on the timing shift of a large EV program (more on this below) and the outlook for GLP-1 demand. At a high level, while the delay on the EV program does create some level of uncertainty, we should see a return to normal backlog draw-down for the Transportation segment over the next 2 quarters (exact trajectory of the ramp-up is somewhat unclear). On the Life Sciences front, while the investor focus has been on GLP-1s, we believe the tailwinds/potential growth drivers are quite diverse and should support growth over the foreseeable future (i.e., growth is not reliant on a singular theme, in our view).

Continued progress in Life Sciences; some puts and takes on EV backlog/ revenue build – In Life Sciences, bookings totalled $335MM (+6% YoY) and reflected organic growth and a ~$18MM contribution from acquisitions. While GLP-1/auto-injector orders were a smaller proportion of bookings this quarter (~LSD% vs. ~10-15% last quarter), the outlook remains favourable for this end-market. And although GLP-1 orders highlight that ATS is leveraged to this silo, the Life Sciences opportunity set is much more diverse, as GLP-1s are among a number of potential growth drivers for this segment (other demand drivers include contact lenses, radiopharmaceuticals, etc.). On EVs, our read is that ~$200MM of order backlog (~35% of the total Transportation backlog exiting FQ3) is on hold through Q4/F24 (in other words, will not contribute to revenue and will result in a margin drag) and will restart in Q1/F25 (April-June 2024 quarter). The revenue/margin contribution in FQ1 will depend on when exactly in the quarter the project gets going, and whether there are any meaningful changes to the order. While many auto OEMs are likely evolving their EV strategies, the roll-out of EV production remains a supportive long-term theme for ATS, and we expect orders to pick up in this segment over the medium-term.

Balance sheet remains in good shape – Leverage exiting FQ3 stands at ~2.3x. We think organic investments and leverage reduction are likely to be the priorities at this point, though management did highlight "no shortage" of potential M&A in the Life Sciences space (recall leverage reached ~3.2x following the SP Industries acquisition).