ATS Corporation
thATS a good end to F2023
Our view: We maintain our positive view on ATS Corporation (“ATS”) following FQ4 results that were ahead of RBC/consensus expectations. The outlook commentary points to supportive demand trends, while the expected conversion of Order Backlog to revenue in FQ1 also implies revenue above Street expectations. We raise our price target +$5 to $69 and reiterate our Outperform rating.
Key points:
Thoughts exiting FQ4 – ATS reported good Q4/F23 results, with revenue/ Adjusted EBITDA/EPS ahead of RBC/Street forecasts. Of note, Backlog conversion came in at 33.9% (above the high end of prior guidance range of 29–32%), translating to revenue of $731MM (+21.2% YoY, +16.5% organically) and reflecting solid program execution ahead of management expectations. Overall, we view ATS’s quarter favorably, particularly as demand remained strong across its end-markets amidst the uncertain macro backdrop (Bookings were +15.5% YoY). Looking ahead, we believe the company remains well positioned to deliver continued growth in F2024 as it delivers on its record ~$2.2B backlog (expecting Q1 backlog conversion of 32–35%) and executes on profitability/continuous improvement initiatives (e.g., recent restructuring, integration of recent acquisitions). Leverage exiting Q4/F23 was ~2.7x (-0.2x QoQ; ~flat YoY) and within ATS’s target range of 2–3x. We believe the improved balance sheet position (which increases the likelihood of M&A) likely contributed to the +6% share price move following FQ4 results today.
Nuclear and Net Zero-driven demand gaining traction – Recall that last quarter, management highlighted that it had received an order in the U.S. related to SMR development and secured work in grid battery storage. Going forward, we believe there could be further opportunities for ATS to expand its Nuclear business as a growing number of governments revisit their position/views on Nuclear energy as a means to achieve Net Zero objectives. And while ATS’s Energy/Nuclear business is relatively small (4.4% of F2023 revenue), in the near-to-medium term we would highlight the following as potential opportunities for ATS: 1) the Darling New Nuclear Project SMR; and, 2) the recently announced contract award for refurbishment of four Bruce Power units (where ATS is currently collaborating on automated solution to support refurbishment efforts). For more information on the outlook for Nuclear, see our note here.
Supply chain puts/takes – Following several quarters of supply chain challenges/disruptions, there has been a reduction in some raw material (commodity) costs; however, price volatility/inflationary pressures continue to impact electrical/mechanical parts (which we expect will continue to be a factor over the coming quarters). The company continues to proactively address these challenges (e.g., through dual-sourcing and enhanced inventory management) while indicating that inflationary pressures and supply chain volatility could continue through F2024.