$AEP.V Q3 Analysis, Q4 and F2022 outlook, valuation and PT Company Overview:
Atlas Engineered Products Ltd. (“AEP” or “the Company”) designs, manufactures, and sells engineered roof trusses, floor trusses, wall panels, and windows. The Company also distributes a range of engineered wood products and patio doors for use by builders of residential and commercial wood-framed buildings. These include single family homes, townhouses, multi-story wood-framed residential buildings, commercial buildings, and agricultural structures. The Company's corporate office is located at 2005 Boxwood Road, Nanaimo, British Columbia V9S 5X9.
Since going public on November 6, 2017, the Company has grown its Canadian footprint with six operations in British Columbia, Manitoba and Ontario. Its six plants consist of: Atlas Building Systems (“Atlas”) (formally Coastal Windows), Pacer Building Components (“Pacer”), Clinton Building Components (“Clinton”), Satellite Building Components (“Satellite”), South Central Building Systems (“SC”), and Novum Building Components (“Novum”)
Atlas Engineered Products Ltd. trades on Venture exchange with a ticker symbol AEP.V.
Q3 Financial Analysis:
Revenues:
$AEP.V announced Q3 2021 results on 16th November 2021. Q3 revenues year over year increased by +81% or +$7.9M from $9.7M to $17.6M, mainly driven by roof trusses (increased +81% from $7.6M to $13.2M) and engineered wood products (increased +148% from $1.7M to $4.3M). In last 9 months, Atlas Engineered revenues have increased by +$16.4M ($41M vs. $25M)
Gross margin:
It appears to me that Atlas has done an amazing job in maintaining and increasing profit both YoY and sequentially in fluctuating rising price environment. Q3 gross margin was $5.4M in Q3 2021 vs. $2.1M; an increase of +156% or +$3.3M. In last 9 months of 2021, the company’s gross margin was $10.9M vs. $5.1M in 2020; an increase of +113% or +$5.8M
As company stated in Q3 prepared remarks “Gross margin for the three months ended September 30, 2021, was 31%, up from gross margin of 22% for the three months ended September 30, 2020. Gross margins also increased to 27% for the nine months ended September 30, 2021, from 21% for the nine months ended September 30, 2020, due to the Company's hard work navigating and controlling pricing during the rising raw material prices and shortages and now the reducing raw material prices, while constantly focusing on improving efficiencies for new product lines and acquisitions. Additionally, the manufacturing equipment bought at the end of January 2021 also improved automation at one of AEP's facilities, with the ability for improved efficiencies within our core product lines”
Net Income:
Finally, a record net income of $2.8M in Q3 21 vs. $0.4M in Q3 20 increased by +567% or +$2.4M driven by increase in revenue, increase in gross profit, and maintaining operating expense around $1.5M (pretty consistent with Q1 21 $1.5M and Q2 2021 $1.6M). In my opinion, with significant increase in revenues, the company has done a great job in maintaining OPEX and passing gross profit to the bottom line.
Atlas Engineered Products as of Jan 16th, 2022, has a market cap of ~$35.2M and an enterprise value of ~$47.7M. Over the last twelve months, the company has done $52.1M in revenues, $4.8M in net income and $9.5M in EBITDA, giving it a PE ratio of ~7.26, P/EBITDA ~2.97 and EV/EBITDA ~5.04.
Valuations:
With company’s guidance of at least generating $50M revenues in Fiscal 2021(announced on 2021-09-17 and I think it is very conservative), with cautious approach, I am assuming, the company will at least do $55M CAD in revenue (54%+ YoY increase in revenue from $36M in 2020) and assuming 13% net income and 20% EBITDA in Q4 2021 (again conservative as Q3 Net income was 16% and EBITDA 25%), giving it EV/EBITDA ~4.4 for F2021. Following are 2021 EV/EBITDA for comparable companies as of January 14th 2022 :
- Beacon Roofing Supply, Inc. (BECN) EV/EBITDA: 10.58
- Richelieu Hardware Ltd. (RCH.TO) EV/EBITDA: 11.09
- GMS Inc. (GMS) EV/EBITDA: 9.21
- UFP Industries, Inc. (UFPI) EV/EBITDA: 8.07
- Stella-Jones Inc. (SJ.TO) EV/EBITDA: 7.96
- Builders First Source, Inc. (BLDR) EV/EBITDA: 7.42
Average EV/EBITDA ~ 9.01
Based on my opinion, using 2021 average EV/EBITDA ratios ~9.01, AEP minimum fair value should be at $74M market cap or share price of $1.28 CAD which is 109%+ upside from today’s price of .61 (This target doesn’t take into account Atlas Engineered Products Announced Letter of Intent for British Columbia Acquisition announced on November 26th 2021 and F22 growth potential)
Insider buying/Normal Course Issuer Bid:
On October 10th, 2021, Atlas Engineered Products Announced Normal Course Issuer Bid. As of January 16th2021, the company has purchased 290,500 stock between .56 to .59 range. I encourage everyone to visit insider buying as insiders have been continuously adding and increasing their ownership in the company.
Why AEP is trading at a significant discount to its peers:
In my opinion, the only reason I can think of is 12,148,019 warrants outstanding at .60 are set expire on Feb 6, 2022 (15 business days from today). As warrants are close to the expiry date, AEP may start to get recognition it deserves (as share price has already started to trade above warrant price of .60 in last week).
Technically, AEP.V shares have been trading between .50 to .60 range since September 2021 to date which is a strong sign as investors are holding tight/adding as warrants come to expire.
Outlook and 2022 catalysts:
Following is what company stated in Q3 2021 MD&A:
“The Company’s objective for 2021 is to continue focusing on improved operations, equipment utilization, and technological advancements to benefit and enhance the Company’s performance. The Company has seen a strong start to 2021 within the construction industry and through its third quarter results. The Company expects to continue to see this impact in the quarterly results as demand remains high. On a pro-forma basis, taking seasonality into account, management believes focused marketing activities, the addition of new product lines, leveling of raw material costs, and the focus on improving costs, should enable these targets to be achievable, but that will depend on the ongoing significant fluctuations in lumber pricing, material shortages, and any lasting impacts of the COVID-19 pandemic. The Company continues to assess M&A opportunities that fit with the Company’s goals and strategies. This has been bolstered by the new financing and credit partnership with TD Canada Trust giving the Company access to more funding for acquisitive growth”
Following are keys catalysts I am watching:
- Strategic acquisition announced in November 2021. The company described the pending deal as an excellent strategic fit for AEP with strong organic growth opportunities
- Wall Panel Business – AEP noted that its pre-manufactured wall panels for the residential, multi-residential and commercial building industry will be a key driver of organic growth going forward
- Expansion into USA in next 12-24 months
- Increase in gross profit and efficiency due to automation of plants
- M&A opportunities as cash increased from $1.6M to $4.4M from Q2 2021 to Q3 2021
- Catching up to its true minimum value and unlocking future growth
Disclaimer: I own shares in AEP.V. I wrote this report myself and the forecasts and estimates expressed herein reflect solely my opinions. This report is not a recommendation or solicitation to buy or sell securities. My analysis may contain inherent errors. Please consult a qualified financial advisor and conduct your own due diligence before making any investment decisions