The coronavirus outbreak has changed the backdrop for ATS Automation’s (ATS Automation Stock Quote, Chart, News TSX:ATA) healthcare segment, says Stifel Canada analyst Justin Keywood.
In a research update to clients today, Keywood maintained his “Buy” rating and one-year price target of $28.00 on ATS Automation, a figure that implied a return of 93 per cent at the time of publication.
The analyst said that with some legwork, he was able to spot a way in which the COVID-19 outbreak has exposed supply chain weaknesses that could benefit ATS.
“ATS’ healthcare segment (~55% of total sales) had elevated organic growth in the past few years (+~20% avg. organic growth) with a solid value proposition,” the analyst said. “We recently spoke to a large multi-billion dollar ATS healthcare customer and believe that strong organic growth will continue, in part from an increasing on-shoring trend for manufacturing. COVID-19 has exposed vulnerabilities in
supply chains but particularly for critical medicines and medical devices. As a result, we believe that companies will increase manufacturing on-shore, benefiting ATS. This trend was already in progress prior as highlighted by an ATS customer for the manufacturing of a wearable diabetes device product. We also note that several of ATS’ customers are seeking to assist in manufacturing urgent medical products to assist in the COVID-19 outbreak, where automation equipment may help in that process. Combined, there remains a dynamic situation but we believe that ATS will be able to adapt with strong management as a secular trend for on-shoring continues.
Keywood thinks ATS Automation will generate EBITDA of $191.7-million on revenue of $1.39-billion in fiscal 2020. He expects those numbers will improve to EBITDA of $219.6-million on a topline of $1.48-billion the following year.
“In 2018,ATS set out a goal of expanding margins by 500 bps in five years and 210 bps have been achieved. We expect the goal to ultimately be exceeded, driven by increasing use of technology. COVID-19 has presented a dynamic situation with challenges but also opportunity for a business that is primarily in healthcare. We rely on good management to navigate this period, where an increasing on-shoring trend and M&A could ultimately lead to more value. We maintain a $28 target based on 12xF2021 EBITDA,” the analyst concluded.