From BeaconBullish Comments re: Homebuilder Activity Bode Well Russell Stanley CFA, MBA | rstanley@beaconsecurities.ca
We are maintaining our $2.75/sh PT. AEP reported Q3 adj EBITDA that was slightly short of headline consensus, but importantly, management’s commentary regarding homebuilder activity is more bullish than it was in August, with order flow suggesting Q4 and Q1 should be relatively strong.
The company has aggressively expanded its sales team to support expected growth in F2025, with stronger lumber pricing representing another tailwind. AEP is now trading 6.8x our F2025 adj EBITDA forecast, representing a 38% discount to the 11.0x at which Builders FirstSource (BLDR-NYSE, Not Rated) trades. Looking into F2026, where our forecast assumes contributions from the robotics/automation upgrades, AEP is trading at 2.9x our adj EBITDA forecast, representing a 71% discount to BLDR at 9.9x. Consensus estimates for BLDR contemplate a 6% EBITDA CAGR during 2024-2026, whereas our AEP forecast calls for a 90% CAGR.
Q3 Adj EBITDA Light v. Headline Consensus - AEP reported Q3 revenue/adjusted EBITDA of $16.6M/$3.1M v. our forecast of $16.0M/$2.9M and consensus at $15.9M/$3.3M. We note that consensus adj EBITDA was pulled higher by two forecasts (of five) that had not been updated in 2+ months, according to FactSet. Revenue was slightly stronger than expected, improving 10% q/q and 15% y/y. Excluding the LCF operations acquired in August 2023, we estimate organic growth at 5% q/q while down 8% y/y. Wall panels’ share of continues to climb, reaching 12% in Q3, with sales improving 120% y/y and 25% q/q. As shown on page 4, lumber pricing has improved considerably since a recent bottom in July, which should support improved pricing for AEP in the quarters ahead. Lower-than-assumed OPEX offset the 61-bps gross margin shortfall v. our forecast, producing adj EBITDA margins 22 bps ahead of our forecast. AEP also produced operating cash flow of $2.0M before working capital, beating our $1.7M forecast. Net of w/c, operating cash flow of $0.8M was light v. our $0.9M estimate, with higher-than-expected A/R and deposits + lower payables partially offset by lower-than-expected inventories.
Gearing Up for More Active F2025 - We view AEP’s commentary as more bullish than it was with the Q2 results in August. Management noted it has seen an increase in homebuilder activity since the BoC’s last rate cut, with notable acceleration over the last few weeks setting up a strong Q4 and spillover into Q1 (weather pending). Atlas has counter-cyclically expanded its sales team by 63%, noting it expects that to help drive revenue/earnings growth next year. Improving lumber prices should also be supportive of pricing/margins, though management noted it will continue to defend market share, while also awaiting clarity on President-elect Trump’s policies (e.g. potential tariffs).
Robotics / Automation Plans Focus on Supplier Selection - During this morning’s conference call, management reported it is now working with several suppliers, particularly given developments at House of Design. Based on management’s understandable caution, we continue to assume that these investments will not contribute to revenue/EBITDA until F2026.
Term Loan Partially Prepaid During Q3 - AEP exited Q3 with cash/equivalents of $16.5M, down from $20M at the end of Q2. AEP made a late-quarter $2.9M prepayment of the term loan with TD (TD-TSX, NYSE, Not Rated) that reduced the balance to $18.0M. The company’s $7.5M revolver was unused at quarter end. Last week, AEP announced a new NCIB for up to 5.9M shares.