National Bank Financial analyst Maxim Sytchev summarized ATS Corp.’s Investor Day event as “qualitative in nature but [showcased the] company’s capabilities and entrenched expertise in secularly expanding areas.”
Following the Wednesday event in New York, he reiterated his “positive stance” on the Cambridge, Ont.-based automation solutions provider’s shares.
“We believe investors will appreciate hearing from divisional leadership and management reiterating positive funnel commentary, even through there are some concerns that shorter-cycle peers have been experiencing peak organic growth lately when it comes to immediate outlooks,” said Mr. Sytchev. “There is also limited scope for upping the numbers in the short term. That being said, the make-up of the investment thesis – 1) evolving U.S. healthcare regulatory backdrop that benefits biologics business; 2) rapid growth in insulin-related drugs (estimated at around 5 per cent of Life Sciences business now); 3) likely additional EV contracts from other OEMs; 4) increasing penetration of services / digital offerings that create a more sustainable revenue tail; 5) onshoring; 6) labour shortages; 7) end-clients need to scale faster (and cheaper) – all lead us to believe that organic compounding supplemented by M&A growth (at least to the similar extent as in the previous five years) should work in investors’ favour.”
The analyst said the event included updates on “several growth opportunities” across its key segments.
“Management reiterated its 15-per-cent EBIT margin target (vs. 13.3 per cent in F2023, likely achievable in the next four years) and highlighted the levers it will pull to get there (although the same levers have been disclosed before),” he said. “These include part/design/product/project standardization, supply chain management, synergies from acquired business (M&A will likely continue at the same pace ($1.4-billion since F2017) as the last five years (criteria here remains ROIC > WACC, the latter estimated at about 10 per cent), portfolio realignment towards higher margin after-sales services and operating leverage enabled by the long-term benefits of increased capex ($100-million annually) diverted towards ATS innovations and growth capex that yields high(er) ROIC results.”
Mr. Sytchev reiterated his “outperform” rating and $65 target. The average is $69.57.
“While 22 times P/E on F2025E is not ‘cheap’, we believe ATS shares can grow into that valuation,” he said. “Superimposing a 15-per-cent operating margin target four years out would put ex-IFRS EBITDA in the $520-plus million range and NAV at $78 (without accounting for any M&A).”
Elsewhere, Stifel’s Justin Keywood maintained a “buy” rating and $75 target.
“Overall, we were impressed with the level of management depth and see the business as continuing to scale well with higher margins and an assumed greater trading multiple ahead,” he said.
“ATS is laying the foundation to become a much larger company and starting with people, as part of the three key pillars of the ABM (people, process, performance). In that regard, management depth and quality was clear at the inaugural U.S investor day. The automation industry is in the midst of benefiting from several secular tailwinds, including, supply chain de-risking, labor constraints, rising wages and union action, among other trends, and we see ATS as one of the few ways to gain pure play exposure at reasonable valuation. As scale builds, both organically and through M&A, margins should follow and lead to a greater multiple and higher stock price. De-risking the view is a solid management team with a track record of execution. ATS currently trades at 13.5 times EBITDA vs. peers at 17 times and we maintain our street high $75.00 target.