After Thursday’s release of “solid” third-quarter results, National Bank Financial analyst Maxim Sytchev sees AtkinsRalis Group Inc. “staying on the right track” and believes “compounding can continue.”
“Numbers are getting cleaner as time is progressing and critically FCF improvements are taking hold even though it’s very hard to model the fluctuations in non-cash working capital,” he said. “Comments around Q4/24 organic growth facing a headwind due to tough comps and project sequencing should not be concerning given backlog growth. With investors using Atkins shares now as a proxy for nuclear sentiment, we have been getting some whippy momentum depending on what the market is seeing in the US from the likes of Nuscale/BWX.
“Resumption of FCF generation on an annualized basis is critical; we saw how powerful that dynamic was with GE ... We can however say that operational improvements are moving in the right direction and 20.4 times P/E (ex-concessions) on 2025E is lower vs. 23 times+ P/Es for the direct CAD peers; risk of M&A is contained for the time being with tuck-in type sizing.”
Shares of the Montreal-based engineering and consulting company, formerly SNC-Lavalin, soared 15.7 per cent on Thursday following the premarket report, which included quarterly revenue of $2.452-billlion that fell in line with Mr. Sytchev’s $2.473-billion estimate and topped the consensus forecast of $2.412-billion by 2 per cent. Consolidated EBITDA of $251-milllion and adjusted earnings per share of 72 cents both exceeded expectations ($246-billion and 68 cents and $239-billion and 66 cents, respectively).
“Tough comps on Q4/23 and the wrap up of major projects last year suggest that ESR [Engineering Services Regions] organic revenue growth will be roughly flat year-over-year in Q4/24E,” the analyst said. “Nevertheless, management is confident in achieving its 8-10-per-cent target for the full year and being able to sustain more than 8-per-cent growth through 2027E. Operations are progressing towards the stated 17 per cent to 18 per cent 2027E EBITDA margin target for the segment. Like most major engineering consultants around the globe, ATRL continues to benefit from increased infrastructure spending across the globe (management does not see a major pullback in government stimulus following the U.S. presidential election).
“Nuclear growth has shifted into a higher gear. The Nuclear business continues to grow at an impressive pace, and the $3-billion-plus backlog provides a significant degree of revenue visibility combined with a relatively attractive margin profile. Management continues to actively promote its new Monark technology and is hopeful that the company can secure an additional new build contract in the foreseeable future (this would be the first new CANDU build in about 20 years).”
While he also believes cash flow generation should “continue gathering momentum, further improving optionality,” Mr. Sytchev trimmed his forecast for the upcoming quarter to “account for muted organic growth in Engineering (closing out unprofitable projects in the UK and Canada as well as tougher comps from last year) as well as potential SBC costs exceeding expectations.”
However, he raised his target for AtkinsRalis by $2 to $76, maintaining an “outperform” rating. The average is $74.50.
Other analysts making target adjustments include:
* Raymond James’ Frederic Bastien to $84 from $70 with an “outperform” rating.
“AtkinsRalis finally backed up its strong organic growth momentum with healthy margin expansion in 3Q24, bringing the promise of its 2025-2027 strategic ambitions closer into view,” he said. “From a growth perspective, we are confident the firm will tackle more than a dozen CANDU refurbishments over the next decade, capitalize on Downing Street’s intention to double water infrastructure investment, and win big pieces of the IIJA opportunity pie. Profitability wise, our expectations have a selective approach to work in Canada, better use of performance analytics and project delivery training, and the Global Technology Centers’ (GTC) continued expansion driving margins steadily higher. We argue ATRL’s multiples will rise in lockstep and ultimately, approach those of its Canadian engineering peers through our forecast horizon.”
* Desjardins Securities’ Benoit Poirier to $87 from $71 with a “buy” rating.
“Given the new year is less than two months away, the longer-term nature of ATRL’s nuclear business and for a better comparison with WSP/STN, we have rolled our valuation forward to our 2026 numbers. Moreover, we have increased our EV/EBITDA valuation multiple to account for the company’s recent execution and the improved balance sheet. ATRL’s nuclear business has high barriers to entry, potentially justifying a higher valuation than its engineering segment if execution persists,” he said.
* ATB Capital Markets’ Chris Murray to $80 from $73 with an “outperform” rating.
“The outlook was better than expected, particularly in Nuclear, and we see the valuation gap to peers continuing to close on M&A and margin expansion. We would continue to add shares at current levels,” said Mr. Murray.
* CIBC’s Jacob Bout to $80 from $70 with an “outperformer” rating.
* Canaccord Genuity’s Yuri Lynk to $80 from $70 with a “buy” rating.