Celestica Inc T.CLS

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Maintain their US$61.00 target. GLTA

INVESTOR MEETING HIGHLIGHTS: BUY THE DIP

THE TD COWEN INSIGHT

CLS has underperformed its peers, but we believe the selloff is overdone and represents a buying opportunity. Our investor meetings last week, combined with recent investor calls, support our thesis that AI infrastructure spending will be robust through next year. We continue to believe that CLS will be a major beneficiary of AI investments and that there could be upside to consensus estimates.

Impact: SLIGHTLY POSITIVE

Trading at a discount to peers. Since hitting its peak on July 16, CLS shares are down 35%, whereas EMS peers are down by an average of 9%. CLS is trading at 10.0x C25 EPS, the lowest multiple within the EMS peer group. We believe this represents a buying opportunity given CLS' higher exposure and defensible position to AI infrastructure investments relative to peers. We also note that CLS has an NCIB with 11.1mm shares remaining to repurchase.

Getting non-HPS business at a steep discount. We believe CLS' unique ODM business, HPS, should trade at a premium to its contract manufacturing business given higher ASPs, margins, and defensibility. HPS was ~30% of revenue in the most recent quarter. We conservatively assume 30% of our 2024 revenue estimate will be HPS (it is likely to be higher), grow that by our 2025E Communications growth rate, and assume a low double- digit EBITDA margin to get to a 2025E HPS EBITDA estimate. Applying the ODM group's 2025E EV/EBITDA multiple of ~10.7x to that HPS EBITDA estimate implies CLS' non-HPS business is trading at 2.6x 2025E EV/EBITDA, less than half the multiple of EMS peers. This includes the higher margin, sticky ATS segment and contract manufacturing for large OEMs, such as Dell and HPE.

No signs of AI spending slowdown. The investor meetings suggested there was no slowing in sight for AI infrastructure investments. We believe the company is having discussions for orders into next year, implying robust momentum. Management reiterated that it expects to maintain or grow revenue with its largest customer despite a product transition with one of its larger programs. CLS has already won the succeeding program and is already working on designs for next-gen equipment. Moreover, Mr. Chawla continued to sound confident in adding additional server customers. We expect to get more colour on 2025 expectations in October, but he remains comfortable with consensus estimates, or $4.04 of EPS.

M&A also possible. Targets to help diversify the business, such as scaling ATS and/or adding capabilities to take the CCS business to new end markets outside the hyperscalers would make sense, in our view.