ATS Automation retains Top Pick banner from Stifel

A new tuck-in acquisition looks good on ATS Automation Tooling Systems (ATS Automation Tooling Stock Quote, Charts, News, Analysts, Financials TSX:ATA), according to Stifel GMP analyst Justin Keywood, who reasserted his “Buy” rating on the stock in an update to clients on Tuesday.

Cambridge, Ontario-based ATS is a custom automation solutions provider to manufacturers. worldwide with automation systems and service offerings for customers in markets like life sciences, food & beverage, transportation, consumer products and energy. The company announced on Tuesday the acquisition of the IP assets of VASPAC, a Canadian software quality assurance and consulting company to the nuclear industry. The financial terms have not been disclosed.

Founded in 2003, VASPAC’s nuclear safety-related software and solutions are considered the gold standard among clients, according to ATS who said the acquisition will create new synergies with the company’s current customers and help expand its product offerings. 

“We are constantly looking to expand our value proposition for customers in the nuclear industry,” said Udo Panenka, President of ATS Industrial Automation, in a press release. “With the expanded capabilities brought on by VASPAC, together with our global scale and the ability to leverage the ATS Business Model and our continuous improvement mindset, this acquisition offers great opportunities for us, in particular around the role of digitization to support our overall strategic road map.”

Looking at the deal, Keywood said it’s expected to allow ATS to take on more nuclear projects and to benefit from VASPAC’s strong reputation in the niche field.

“Revenue synergies are anticipated as well through the expanded portfolio offerings that can be sold to overlapping customer bases. We also see VASPAC as further building on ATS’ aftermarket sales offering, which has increased from ten to 12 per cent of total sales in 2017 to mid-to-high teens today with higher EBITDA margins,” Keywood wrote in his report.

“Overall, we see VASPAC as a good tuck-in acquisition that is consistent with ATS’ technology focus and expect a value-creating M&A strategy to continue. ATS has executed on seven acquisitions since 2021 and a robust pipeline remains (30+ assets),” he said.

ATS had a fantastic 2021 where the stock returned 125 per cent compared to just under five per cent for all of 2020. So far this year, ATS is down about three per cent.

But Keywood sees more upside ahead for the stock, pairing his “Buy” rating with a reiterated top pick designation and target price of $66.00 per share, which at the time of publication represented a projected one-year return of 37.8 per cent.

“In our view, ATS executes well in an above-average growth industry with the backdrop of supply chain disruptions, rising costs/wages and a tight labour market. ATS operates in the higher valued verticals within the industry, like Life Sciences (~50 per cent of sales) and leading to even higher growth,” Keywood wrote. 

Keywood also said ATS Automation is currently trading at a discount to its peer group.

“The company is also executing on a disciplined M&A program through largely a cultivation strategy at favourable multiples. ATS continues to be undervalued at 13x forward EBITDA versus peers at 20x. We maintain our $66 target based on 16x F2023 EBITDA estimates and continue to highlight ATS as our top pick,” he said.

Of the company’s positive attributes, the analyst listed off the following: ATS’ positioning within the strong secular trend for on-shoring due to vulnerabilities revealed recently in supply chains; the company’s targeting of high-valued verticals in diabetes, contact lenses, cancer and CV therapies and electric vehicle model changes; the company’s margin expansion which has put on over 500 bps over five years; the company’s reinvigorated work culture where employees are now engaged again with the new CEO, according to Keywood, and customers are buying more; and ATS’ potential for further M&A, with over $400 million in capacity to expand the company’s scale and geographic reach.

 ATS reported its third quarter fiscal 2022 results earlier in the month, showing revenues up 48 per cent year-over-year to $546.8 million and adjusted EBITDA of $83.5 million for a 15.3 per cent margin compared to $53.1 million for an adjusted EBITDA margin of 14.4 per cent a year earlier.

The company reported its order backlog was up 50 per cent to $1.475 billion as of December 26, 2021, compared to $985 million a year earlier. Order bookings were also up 54 per cent to $671 million.

“The third quarter of fiscal 2022 featured record Order Bookings, Order Backlog and revenues driven by both organic growth and solid contributions from our acquisitions. The deployment of the ABM and effective countermeasures put in place to protect our people and our operations resulted in good results for customers and shareholders despite the resurgence of the COVID-19 pandemic and ongoing supply chain disruptions,” said CEO Andrew Hider in a February 3 press release.