Beacon Report and Target Price of $2.25Atlas Engineered Products Ltd. (AEP-V) Increasing PT on $29M Acquisition Russell Stanley CFA, CMT, MBA | rstanley@beaconsecurities.ca Donangelo Volpe - Associate | dvolpe@beaconsecurities.ca
After Many Singles, AEP Hits One Out of the Park
– We are increasing our PT to $2.25/sh from $1.75/sh following estimate revisions reflecting the $29M acquisition announced this morning. This is a major transaction for AEP, as the purchase value exceeds the aggregate purchase price of all prior M&A combined (8 acquisitions for an aggregate price of $18M). We have increased our F2024 adjusted EBITDA forecast from $14M to $23M, which we view as conservative given the acquisition generated over $9M in stand-alone EBITDA in F2022. Well-Priced Acquisition Adds High Margin Operator
– Earlier today, AEP announced the acquisition of Lon Chouinard et Fils Co. (LCF), a New Brunswick-based manufacturer of roof trusses, floor systems, and wall panels, and a supplier of engineered wood products (EWP). The aggregate purchase price was $28.9M, including $2.8M in working capital adjustments. AEP also obtains land/buildings with an appraised value of $2.8M. The purchase price included $2M in stock (1.7M shares at a deemed price of $1.14/sh, subject to a 4-month hold) and $26.9M in cash supported by a term loan and mortgage for an aggregate of $22.4M, and secured by the NB assets as well as the Lantzville (BC) operation. The debt pays prime + a premium based on AEP’s quarterly debt/EBITDA, equivalent to prime plus 25 bps at closing. Management noted it relied on debt financing to preserve cash for future strategic plans. LCF produced F2022 revenue of $25.7M with adjusted EBITDA of $9.5M (a 37% margin vs. AEP’s 25% in F2022).
The purchase price represents 3x F2022 EBITDA (or 2.8x excluding the real estate value). Transaction Checks Multiple Boxes – We view the transaction favourably, and it is consistent with management’s stated growth priorities. LCF is very well established, with over 40 years in operation, though we understand that (unlike prior AEP targets) it brings highly sophisticated accounting/manufacturing/logistics systems to the table. The transaction broadens AEP’s geographic footprint (it previously had no facilities east of Ontario), establishing a strong revenue base in both New Brunswick (pop. 800k) and Quebec (8.5M). The company also has a sales office in Edmundston, right on the Maine border (see page 3), so this transaction sets up AEP to re-enter the US market as well. With the LCF revenue base focused heavily on trusses/wall panels, we expect AEP to drive expanded distribution of engineered wood products (EWP), leveraging Atlas’ buying power as a larger distributor of EWP. The LCF facilities include an 18k SFT roof truss manufacturing plant, a 17k SFT prefabricated wall and pre-assembled floor plant, and an 8k SFT floor joist plant. We understand the land/facilities offer significant expansion capacity and automation potential, with LCF able to source both lumber and EWP locally. Finally, LCF should be seen as a platform acquisition that sets AEP up for further M&A in the region. Now Trading at a 49% Discount to Closest Peer
– AEP trades at 4.2x our new F2024 adjusted EBITDA forecast, up 14% from the 3.7x at which it traded in late February. That multiple represents a 49% discount to the 8.1x at which the closest peer trades (Builders FirstSource [BLDR-NYSE, Not Rated], in line with the 8.2x it traded at in late February). Potential catalysts include the Q2 results (next week), further M&A activity, and contract wins. As shown on page 5, the stock has broken out of its trading range and is now working to re-establish its prior uptrend, supported by strongly positive momentum.