ATS Corp T.ATS

RBC

[retiredcf]

September 12, 2023

ATS Corporation
Highlights from the RBC Global Industrials Conference

TSX: ATS | CAD 59.15 | Outperform | Price Target CAD 69.00

Sentiment: Neutral

This afternoon, Andrew Hider (Chief Executive Officer) and Ryan McLeod (Chief Financial Officer) presented during day one of RBC’s Global Industrials Conference. Overall, our discussion highlighted the attractive opportunity set across the company’s larger end- markets, opportunities across smaller (but growing) end-markets (e.g., Nuclear and battery storage), and the company’s capital allocation priorities. We rate ATS Outperform with a C$69 price target. For more information on ATS, see our recap note following the company’s Investor Day event last week here.

We highlight key takeaways from our discussion:

• Demand outlook remains supportive. Overall, our read of management’s commentary is that demand across its end-markets remains supportive. The investor inbounds we have received over recent weeks/months have centered on the potential impact of a macro slowdown on ATS’s backlog/growth. Commentary from management during our discussion indicates that the demand outlook is still favorable across the company’s end-markets, and this is likely driven by its involvement in high-growth sub- segments across each of its major end-markets. The one (smaller) market on which the company is keeping a close eye is Personal Care (which falls within ATS’s Consumer Products end-market), as it could be impacted by the macro cycle. With that said, we note that this market is likely not material within the overall ATS portfolio, as we believe it is a low-single-digit % contributor to total revenue.

• Life Sciences demand remains strong across sub-segments in which ATS participates. Across the Life Sciences market, ATS is involved in multiple sub-segments, such as medical devices and pharmaceuticals. Much of the work that the company takes on across these end-markets is tied to new/growing products that its customers are involved with, which enables the company to generally avoid exposure to more commoditized products that may be more susceptible to the macro cycle. Overall, management commentary indicated that demand in this end-market remains supportive.

• Transportation (EV) end-market has become a meaningful part of the business. The company’s primary focus area within Transportation is related to EVs, and more specifically battery pack assembly. The backlog in this segment has grown considerably over the last 12 months, and the focus over the near term will be on successful delivery of projects, the level of working capital investment (management noted that this end-market has higher working capital requirements relative to rest of the ATS business at ~mid-teens %), and the realization of milestone payments. Overall, ATS likes the setup/opportunity over the coming years, and the cash flow generated in this end-market could help support growth in other end-markets/growing areas.

• Nuclear is a smaller offering but could become more meaningful over time. ATS’s capabilities in the Nuclear space range from refurbishment to decommissioning to involvement with SMRs. While this is a smaller end-market for ATS for now, the headlines we have seen related to potential new builds/refurbishments across Canada indicate that this segment could become more meaningful over the coming years if these headlines translate into projects that get the “green light”. For additional color on the opportunity set in Nuclear, please see our recent notes here and here, and our note following a Nuclear deep-dive with SNC- Lavalin (now known as AtkinsRealis) here. Last week, we also hosted a panel on the Future of Nuclear with leaders from SNC- Lavalin (AtkinsRealis), Bruce Power, and the Canadian Nuclear Association; please see the link here for our recap note.

• Capital allocation: internal investment and M&A are primary areas of focus. Management noted that all investments are assessed on a ROIC-basis, and internal investments (e.g., innovation spend, organic initiatives) are the primary focus (as they generate the highest returns). M&A is the second area of focus, and all potential acquisitions are assessed against the company’s cost of capital (currently just above 10%). While share buybacks are possible, this is not an area of focus and the company would be opportunistic with repurchases.