ATS Corporation
hATS off to another good quarter
Our view: ATS Corporation ("ATS") reported Q3 revenue/Adjusted EBITDA that were ahead of RBC/consensus forecasts. Looking ahead, we believe ATS remains well positioned to deliver on its record backlog and continue to see solid demand across its end-markets. Revising price target +$9; reiterate Outperform.
Key points:
Thoughts exiting Q3 – ATS reported good Q3/F23 results, with revenue/ Adjusted EBITDA ahead of RBC/Street forecasts and EPS just shy of RBC/ consensus estimates (driven by higher-than-anticipated interest expense). ATS reported strong results across most end-markets, while Life Sciences and Energy were impacted by project timing and a lower Backlog, respectively. Overall, we view ATS' quarter favorably, particularly as Transportation/EV and Consumer Products demand remained strong despite the uncertain macro backdrop. ATS reported a record backlog of $2,143MM (+45% YoY, in part driven by a US$221MM booking from an existing automotive customer; Transportation/Life Sciences now account for 41%/37% of the Backlog), which we believe positions the company well for Q4/F23 and beyond (note that ATS expects Backlog conversion of 29%-32% in Q4; we forecast $628.9MM of revenue).
Opportunities in Energy/Nuclear space could expand TAM, but still in the early stages – On the earnings call, management highlighted two interesting new initiatives/opportunities: 1) ATS has received an order in the U.S. to develop a manipulator system prototype for fuelling Small Modular Reactors ("SMRs"). At the moment, ATS is primarily involved with traditional, large-scale reactor refurbishment/decommissioning; however, the recent global "re-think" on Nuclear energy could lead to a renewed focus on new builds (and particularly SMRs), which could, over the long run, provide potential opportunities for ATS. For the time being, Energy is a small and steady market for ATS, and the above commentary is meant to highlight potential for a larger opportunity set over the long-term. For more information on the outlook for Nuclear, see our recent note here. 2) ATS has secured work in grid battery storage, where the company can leverage its experience in EV battery pack assembly. Although the vast majority of electricity globally is currently stored via pumped-storage hydropower, we believe that grid-scale storage is a large opportunity, particularly as the world moves more toward renewable energy and requires storage solutions for the relatively more intermittent nature of this power source. For more information on the electricity grid modernization opportunity in the U.S., see p.32 in our recent note here.
Balance sheet and capital allocation – Leverage exiting Q3/F23 was 2.8x (-0.4x QoQ; flat YoY), with the company having access to ~$607MM of liquidity. In terms of capital allocation, we expect ATS to continue prioritizing internal investments (W/C and capex) as well as M&A (particularly as the balance sheet improves).