CIBC Notes1) AtkinsRalis (Outperformer; $70 Price Target)
Our Conclusion – Still A Solid Valuation Argument: As presented at our CIBC Eastern conference, the macro environment for ATRL’s end markets remains robust. ARTL raised its Y/Y 2024 Nuclear organic growth in Q2/24 from 15%-20% to 30%-35% given the robust outlook for CANDU life-extension work (C1 in Romania, Qinshan in China, with negotiations ongoing for Pickering in Canada and other global opportunities) and increased demand for Services work, including GE-Hitachi (SMR’s in Canada/Poland), Rolls Royce (U.K.) and EDF (U.K. and France). The CANDU MONARK is a longer-term new build opportunity (refer to our April 15 report: Fission or Fizzle?). As disclosed at its June 2024 investor day, ATRL is targeting Engineering Services segment 2025-2027 organic revenue CAGR of >8% [note that
ATRL has historically been conservative (2023A: 21%; H1/24A: 15%)]. The “Land and Expand” strategy in the U.S. is working very well (headcount increased by 22% over 2022 and 2023) and ATRL now has ambitions to be a top-10 provider in the U.S. (ENR currently ranks ATRL as #20 in the U.S.). The LSTK hangover should soon clear as the LSTK rolls off (Trillium is close to being handed over, Eglinton is getting to the end of testing, and REM
should be completed by end of 2025). The sale of Linxon and 407 will provide funding for potential M&A. Still, a strong valuation argument is to be made with ATRL core Engineering Services & Nuclear business trading a 4x-5x multiple discount to its peers.
Q3/24 Preview: As shown in the Exhibit 27 table, we forecast ATRL to report Q3/24 adj. E&C EBITDA of $224MM (vs. consensus $221MM), up ~33% Y/Y. That being said, we are expecting Y/Y net revenue growth to slow in Q3/24 given tough Y/Y Engineering Services comps and slowing Canadian battery work. ATRL continues to guide for >$400MM in CFO for FY2024 and expects cash flow to improve in H2/24 due to 1) the ramp-down of cash usage from LSTK, 2) improving EBITDA in the core Services business, and 3) seasonal working capital improvement in H2 relative to H1. The focus for Q3/24 reporting will be on ATRL’s Services backlog trends (recall, Q2/24 was a record level) and FY2024 guidance (recall, ATRL raised its Nuclear guidance, but left Engineering Services Regions guidance.