Buy Atlas Engineered Products on the dip, says Beacon

Shares of Atlas Engineered Products (Atlas Engineered Products Stock Quote, Charts, News, Analysts, Financials TSXV:AEP) fell sharply after the release of quarterly earnings last week, but Beacon Securities analyst Russell Stanley said investors should be taking advantage of the pullback. 

In a Monday update, Stanley reviewed AEP’s first quarter results and reiterated a “Buy” rating on the stock and $1.75 target price, which translated at press time to a one-year return of 59 per cent.

Headquartered in Nanaimo, BC, Atlas Engineered Products designs, manufactures and sells engineered roof and floor trusses and wall panels along with distributing a range of engineered wood products.

The company released its Q1 2023 on Friday, which included revenue of $9.6 million, down from $12.4 million a year earlier, and adjusted EBITDA of $1.7 million compared to $3.0 million a year ago. 

Atlas said the revenue decline was due to a delay in a large order, one which is expected to be cleared up in the second quarter, lower material prices and a slowdown in home building in some parts of Canada (mainly in Ontario) due to higher interest rates, although the company expects the slowdown to be relatively brief, with increased demand due to population growth and the housing deficit to prevail.

“The Company is continuing to operate in a more competitive market for 2023 as interest rates have risen in order to slow inflation,” Atlas said in a press release. “The Company will continue to monitor the effects of interest rates on the housing market, and is prepared to manage pricing and explore new markets in order to continue to drive organic growth as much as possible during fiscal 2023.”

On the Q1 numbers, Stanley said the $9.6 million topline was under his forecast at $10.2 million and EBITDA at $1.7 million was also under his projection at $2.0 million. The analyst said he had expected a slow quarter due to seasonality, reduced lumber prices and homebuilder uncertainty at the start of the year, and he added that without the large customer order delay, revenue and EBITDA would have been in-line with estimates.

“Our thesis is very much intact, as AEP is well positioned to benefit from Canada’s chronic housing deficit,” Stanley wrote. “Investors should view the recent weakness (down nine per cent on Friday, after rallying from an intraday low below the $1.00/sh level) as a buying opportunity.”

Stanley said Atlas continues to have a healthy cash balance at $16.2 million at the quarter’s close versus debt and leases of $14.5 million. The analyst said he expects the company will be pursuing M&A opportunities with a focus on attractively priced targets with untapped growth potential and based in less competitive/higher-margin markets.

Stanley said housing starts have shown a strong recovery in April, which bodes well for a strong Q2 for Atlas. On a comps basis, Stanley said AEP is currently trading at a 49 per cent discount to peer Builders FirstSource (ticker BLDR).

“We view AEP as a play on many of the same demographic/housing construction trends that BLDR’s comparable business segment focuses on, while AEP offers superior EBITDA margins/growth. Potential AEP-specific catalysts include M&A activity, contract wins, and the Q2 results in August,” he said.