June 12, 2023
ATS Corporation Recapitalized and ready to roll
Our view: We are resuming coverage of ATS Corporation ("ATS") following its U.S. IPO. The equity offering improves the company's balance sheet position and sets up ATS well to execute on its M&A strategy, which has created meaningful value for shareholders in recent years. Overall, ATS has performed well since Andrew Hider was appointed as CEO in 2017 (e.g., strong organic growth, margin improvement, prudent capital allocation), and we believe this equity offering positions the company well for the next leg of its journey. Reiterate $69 price target and Outperform rating.
Key points:
U.S. IPO and listing provides flexibility – ATS has completed its U.S. IPO, raising ~US$283MM of gross proceeds (net proceeds of ~US$271MM) from the sale of 6.9MM shares (including the over-allotment of 900K shares). The offering improves the leverage profile (we estimate pro-forma leverage of ~1.8x) and better positions the company to execute against its M&A strategy – i.e., ATS is now positioned to undertake sizable M&A from its balance sheet and still remain within its target leverage range of ~2x-3x (see inside for more details). ATS has made significant progress since the appointment of Andrew Hider as CEO (e.g., strong organic growth, margin improvement, prudent capital allocation), and we reiterate our positive view on the company driven by the supportive long-term industry backdrop, a track record of solid execution, and the outlook for M&A going forward. For additional color on our positive thesis on ATS, see our recent initiation here.
Recent Transportation (EV) wins push backlog to all-time high – As of Q4/ F23, ATS’ backlog was a record $2,153MM (reflecting YoY growth for 11 straight quarters). ATS’ backlog growth has reflected notable EV-related wins for the capacity expansion of automated battery assembly systems. The sizable project wins have driven the backlog to an all-time high and provide good revenue visibility over the coming quarters/years. Going forward, we believe there is still a long runway for EV investment/capex as the transition to Net Zero continues over the coming decades (i.e., a macro slowdown may not necessarily lead to a slowdown in automotive customers' capex programs). Over the near- to medium-term, we expect ATS to deliver sustained top-line growth, which we expect will reflect a combination of organic growth (as the company converts its sizable backlog into revenue) and M&A (supported by its well-positioned balance sheet).
Pro-forma leverage provides flexibility for M&A – We estimate that following the U.S. IPO, ATS’ pro-forma Net Debt/LTM Adjusted EBITDA will stand at ~1.8x (vs. ~2.7x exiting Q4/F23), below ATS' historical targeted leverage range of ~2x-3x. We believe the company's leverage profile positions it well to pursue M&A going forward, which we view positively given ATS' track-record of creating shareholder value through acquisitions.See inside for more on ATS' M&A playbook/track-record, as well as an analysis of potential M&A capital deployment.