CANADA BEST IDEAS: FAVOURABLE GROWTH & MARGIN OUTLOOK; ATTRACTIVE VALUATION
THE TD COWEN INSIGHT
AtkinsRealis is a global professional services and project management company that has transformed itself in recent years by focusing on its higher-returning engineering and nuclear operations, while exiting more volatile/lower-margin businesses (oil & gas and construction). We are bullish on ATRL's outlook and view the stock's valuation as attractive, considering its notable discount vs. peers.
Summary Of Our Thesis
We are positive on ATRL's outlook and see the stock's risk/reward profile as attractive. ATRL's core Engineering Services Regions and Nuclear segments are well positioned to continue realizing strong organic revenue growth (+14.9% y/y and +31.0% y/y, respectively YTD), supported by robust backlogs and favourable demand trends. Regarding margins, management is focused on driving margin improvement in ATRL's largest segment (Engineering Services Regions, which accounts for ~75% of ATRL's consolidated TTM revenue). Finally, with leverage at 1.9x net recourse debt-to-EBITDA and cash flow expected to show meaningful improvement this year, ATRL has considerably more capital allocation flexibility than in recent years.
What Is Underappreciated Or Misunderstood?
We believe that some investors continue to over-emphasize the risks associated with ATRL's remaining LSTK Projects work, and underappreciate management's focus on margin improvement.
Catalysts & Milestones To Watch
We view strong execution over coming quarters, including ongoing solid organic growth, margin gains, the continued orderly wind-down of LSTK Projects work, and delivering on cash flow guidance as catalysts that will support expansion in ATRL's valuation. We also see a potential return to an investment grade credit rating and the announcement of tuck-in acquisitions (both nearer-term possibilities, in our view) as catalysts for the stock.
Price Target & How We Value The Stock
Our $76.00 price target is based on a sum-of-the-parts methodology. We value ATRL's Professional Services & Project Management (PS&PM) operations based on a blended target multiple of 12.7x applied to our 2025 EBITDA forecast, although with favourable execution, we see upside potential to this target multiple, considering where Canadian engineering services peers are trading (15.8x/13.4x 2024E/2025E EBITDA, on average).
What Is The Bear Case & The Risks To Our Call?
Key risks to our call include possible meaningful cost overruns and/or cash outflows associated with LSTK Projects work, a weakening of end-market conditions, and failure to deliver improved margins.