Key Takeaways From Lunch With Management Our Conclusion
We hosted the management team of AtkinsRalis (CEO – Ian L. Edwards
and CFO – Jeff Bell) for an investor lunch on May 28. The main discussion
was on organic revenue growth, margins, M&A, LSTK work-down, and the
potential divestiture of Linxon/407. The June 13 Investor Day should be a
catalyst for the stock, when ATRL will provide 2025-2027 targets
(highlighting potential expectations for continued margin enhancement,
organic revenue growth, improved FCF conversion, and the M&A strategy).
We reaffirm our $64 price target and Outperformer rating.
Key Points
1) Awaiting More Visibility Before Revisiting F2024 Engineering
Services Regions Growth Guidance / Very Confident In Nuclear
Guidance: Recall, ATRL kept its F2024 Engineering Services Regions
organic revenue growth target unchanged at 8%-10%, despite recording
solid 18% growth in Q1/24 (and 21% growth in F2023). ATRL indicates
that although it is quietly confident (and not seeing any softness in
particular), it would like to get more visibility into H2/24 by waiting
another quarter before revisiting its F2024 growth target for the segment.
The F2024 Nuclear organic revenue growth guidance raise to 15%-20%
(along with Q1/24 results) was a reflection of a number of large project
awards that provide management with increased confidence for the
balance of the year. Note, the guidance increase was driven by already
secured work for 2024, with potential further upside should new
contracts be awarded.
2) Confident In Achieving F2024 Margin Targets; Investor Day To
Showcase Margin Enhancement Opportunity: ATRL is confident in
achieving its F2024 Engineering Services Regions adj. EBITDA margin
Y/Y improvement target of a ~100bps (at the midpoint of guidance), and
notes that there is room for further improvement (2025-2027 targets to
be released at the June 13 Investor Day). While Q1/24 saw a 50bps Y/Y
margin improvement, ATRL expects this rate to strengthen over the
balance of 2024. ATRL is implementing several initiatives, including
bringing Canada margins in line with other regions (by focusing on larger
projects that improve utilization and by updating its pricing strategy).
Improving utilization rates, and increasing the use of technology (without
a meaningful capex bump) and the Global Technology Center in India
(historically used by only by the U.K. and Middle East) will be a
continued focus for the company.
3) M&A A Focus Now: ATRL has expanded its M&A team and is now
actively searching for potential targets (negotiations ongoing), with a focus
on U.S. tuck-in opportunities (sweet spot of 200-300 employees). With the
balance sheet in good shape (net debt / EBITDA of 1.7x) and ATRL set to
generate positive FCF (~$200MM in 2024 and ~$400MM in 2025 as per
our estimates), the M&A strategy is not dependent on the sale of its stake
in 407 (value of ~$1.75B in our SOTP valuation) or Linxon.