Keystone Financial Atlas Engineered Products (AEP:TSX-V)
Price: $1.32
Market Cap: $84.8M
Description:
Atlas Engineered Products designs manufactures and sells engineered roof trusses, floor trusses, and wall panels. The company also distributes a range of various engineered wood products for use by builders of residential and commercial wood-framed buildings.
The company’s strategy is focused on profitability and organic revenue growth within its current markets, and the pursuit of a roll-up acquisition strategy to consolidate similar companies operating in the truss and engineered wood products industry across Canada.
Slide 2
I covered Atlas back in February 2023 and again in July 2024, and at the last time I covered it I indicated that the business was not cheap trading at 40x trailing earnings and 15x EV/EBITDA given the market is anticipating the company’s recent investments to propel the financials over the next 2 years.
So quickly updating on the business.
Slide 3
The company has made 8 acquisitions since going public in 2017. With the most recent acquisition in August 2023, when it acquired Lon Chouinard et Fils Co. Ltd. located in New Brunswick which I touched on in July when I covered the stock. CLICK And just last week the company announced that it completed due diligence for a truss manufacturing company located in Western Canada and intends to close the transaction in early Spring of 2025. Atlas will now start working on a share purchase agreement for the purchase price of $3.8 million in cash and stock, plus a working capital adjustment. The acquisition target generated 3-year average revenues of over $11 million, net income of approximately $950,000 and adjusted EBITDA of approximately $1.15 million.
Slide 4
On June 26, 2024, Atlas closed its bought deal and concurrent brokered private placement for aggregate gross proceeds of $14.5M through the issuance of 10.8M common shares at a price of $1.35 per share. So the share count should now be closer to $69M shares outstanding.
On June 6th, the company announced that it accepted proposals for the installation of robotic automation equipment at three of its locations and that it has made initial deposits to secure the installation of equipment. The robotics installation is expected to have a total cost of just over US$7 million for all three locations. And the robotic automation is anticipated to double the board-foot output of roof truss manufacturing while providing “potentially significant” cost savings.
And I saw an estimate from Cormark which placed the estimated robotics initiative to cost CAD$25-$26M over the next two years with a new greenfield facility accounting for $15-$17M and the investments expected to increase truss manufacturing capacity at about 400% at Hi-Tec, 100% at LCF (which is the last acquisition they made) and 50% from Clinton, with expected lower operating expenses and approximately 50% reduction in labor costs… And the robotics upgrades are expected to be completed over the next 2 years.
Slide 5
Now moving to the Recent Financials (Q1 2024):
| CAD$ Millions | Q2 24 | Q1 24 | Q4 23 | Q3 23 | Q2 23 | Q1 23 | Q4 22 | Q3 22 | Q2 22 | Q1 22 | Q4 21 | Q3 21 | Q2 21 |
| Revenue | $15.1 | $9.1 | $14.2 | $14.4 | $11.2 | $9.6 | $15.0 | $17.6 | $14.4 | $12.4 | $13.9 | $17.6 | $14.4 |
| Net Profit | $0.7 | $(1.0) | $0.5 | $1.3 | $0.8 | $0.5 | $2.1 | $3.1 | $1.6 | $1.6 | $2.5 | $2.8 | $1.6 |
| EPS | $0.01 | $(0.02) | $0.02 | $0.02 | $0.01 | $0.01 | $0.04 | $0.05 | $0.03 | $0.03 | $0.04 | $0.05 | $0.03 |
- Revenue increased 34% to $15.1M, due to acquisitive growth and organic sales growth.
- Adj. EBITDA was up 50% to $3.1 million due to an increase in revenue.
- Net income was down 10% to $705K or $0.01 per share due primarily to the amortization related to the intangible assets of the LCF acquisition.
- Balance sheet had $20.0M in cash, with $29.9 million in debt and leases, providing a net debt position of $9.9 million. And the company has a trailing net debt to EBITDA multiple of 1x which is reasonably.
Slide 6
And just looking at the outlook, management indicates that markets continue to be very competitive in 2024 given rising interest rates which have affected the housing market (and the company’s near-term growth). But the company notes that it recognizes the need to be ready for a potential significant increase in demand as interest rates decrease during 2024 given the number of homes still needed to be built to support Canada’s population growth.
Slide 7
Okay, so I thought it would be representative to show some rough pro-forma numbers for FY 2025 which is allowing the stock to hold up quite well despite headwinds across the sector given elevated interest rates.
So if we include FY2023 financials as a base, and add 7 months from the LCF acquisition which was closed August 2023, as well as 8 months of the new acquisition which we are hypothesizing will close in May 2025, along with potential 50% labor savings from the robotics investments… we would be looking at revenue of ~$71.7M, Adj. EBITDA of ~$20.9M and net income of ~$12.8M.
| CAD$ Millions | Revenue | Adj. EBITDA | Net Income |
| FY 2023 (Base) | $49.4M | $9.3M | $3.1M |
| Add: LCF Acquisition (Aug 2023) (adding 7 months not included in 2023) | (7/12*$25.7M) = $15M | (7/12*$9.47M) = $5.5M | (7/12*$6.3M) = $3.7M |
| Add : New Acquisition (Assuming Completion May 2025) (adding 8 months) | (8/12*$11M) = $7.3M | (8/12*$1.2M) = $0.8M | (8/12*$1M) = $0.7M |
| Add: Robotics Cost Savings (50% of labor) | N/A | ($10.5M*50%) = $5.25M | ($10.5M*50%) = $5.25M |
| TOTAL | $71.7M | $20.9M | $12.8M |
Now keep in mind, I am making assumptions here which may or may come to fruition including cost savings being realized in FY2025 (which may only come in FY2026) and does not include any unexpected acquisition costs or a drag on earnings from investments…. As well as assuming the acquisition will close in the Spring of 2025… specifically in May. So take these figures with a grain of salt, but CLICK if we use these figures the company is trading at about 6.6x forward earnings and with an EV/EBITDA multiple of 4.5x.
SLIDE 8
Conclusion:
So, as you can see with my proforma numbers, the stock is holding up quite well given the assumption that forward numbers will look quite well. Plus, the shortage of Canadian homes appears to provide a good runway for growth for Atlas.
And whether I think it’s a buy sell or hold, I think it really comes down to whether an investor believes Atlas will be able to fulfill their new upcoming capacity and capitalize on the potential cost savings which could grow earnings over the next few years. But just like Hadi had said to us previously, elevated interest rates could disrupt the company’s near-term growth.
We will be speaking with management on Thursday this week to get some more insight on the potential cost savings, strategy and ability to fulfill capacity, and for us to get more color on the current market environment given elevated interest rates. So if you have any questions that you would like me to ask management, please comment them on Youtube and I will try to make sure we ask them.