Stifel explains why ATS Automation is a buy

Stifel GMP analyst Justin Keywood says that COVID-19 is presenting both challenges and opportunities for ATS Automation Tooling Systems (ATS Automation Tooling Systems Stock Quote, Chart, News TSX:ATA).

The analyst updated clients on the company Thursday and reasserted his “Buy” rating and $28.00 target, which at press time represented a projected return of 50 per cent.

Keywood held virtual meetings with ATS management, who pointed to a long-term secular trend of on-shoring, particularly in healthcare, which should benefit ATS since manual labour costs are reduced through automation when transferring manufacturing from overseas. In effect, ATS said its customers are reexamining supply chains and seeing gross margins improve from 45 to 65 per cent through automation in the healthcare field.

As for the COVID-19 pandemic, ATS is seeing activity in test-kit automation and vaccine development for currently in-progress trials, with the company having already secured several COVID-19-related contracts including a record $65 million award for TessyPlastics.

On the challenges side, Keywood said ATS is seeing the impact of travel restrictions and work protocols on its efficiency, with the company saying that it still sees its 500 basis point margin expansion goal as intact but potentially coming on a longer time horizon.

On the whole, Keywood said, “We continue to see our thesis as very compelling but with some short-term challenges related to COVID-19, along with new opportunities. We also have confidence in management to execute well which is a key risk reduction point in our view.”

After a superb 2019 where ATS returned 49 per cent, the stock has had a lot of volatility in 2020, falling with the February and March market pullback, quickly recovering and then falling back again over the last few weeks. In total, ATS is currently down 13 per cent for the year.

On the company’s cash generation, Keywood said working capital as a percentage of revenue was about 12 per cent in its fiscal 2020 (ended March 31), while the company has no material bad debt expenses recorded and its customers are generally all of Tier 1 quality, according to the analyst.

On the M&A front, Keywood said the pandemic has created challenges although acquisitions remain “a clear part of ATS’ strategy,” with ATS currently having about $730 million in liquidity.

“We remain bullish on ATS’ healthcare segment, which has a rapidly developing new area related to test kit automation for COVID-19 and is a global opportunity as an on- shoring trend progresses in the background. Although ATS has conveyed caution, we see healthcare as supporting the business in the near term, evidenced by the $65-million contract in Q1. ATS is also expected to be acquisitive with a potential focus in the healthcare segment that we see as a valuable pursuit. ATS recently drew down $250
million of a credit facility that could be used for M&A. Our conviction in ATS remains high and we maintain a $28.00 target based on 12x C2021 EBITDA,” Keywood wrote.

Looking ahead, Keywood thinks ATS will generate fiscal 2021 EBITDA of $192.4 million on revenues of $1.466 billion.