Atlas Engineered Products keeps Buy rating with Beacon

Beacon Securities analyst Russell Stanley gave an update to clients on Thursday on Atlas Engineered Products (Atlas Engineered Products Stock Quote, Charts, News, Analysts, Financials TSXV:AEP), saying the stock should be a good pickup on the dip.

“We continue to view AEP as an undervalued play on Canada’s housing deficit, combined with the need for home builders to manage labour costs and cash flow, and we encourage investors to buy on any weakness,” Stanley wrote.

Based in Nanaimo, BC, Atlas Engineered Products makes engineered roof trusses, floor trusses and wall panels along with distributing a range of engineered wood products. As such, its business is closely tied to the home-building industry.

Stanley reported on the latest figures on housing starts from the Canadian Mortgage and Housing Corporation. The CMHC said starts came in at a seasonally adjusted, annualized rate of 202K in May, which was ten per cent below the consensus forecast of 225K and represented a 23 per cent decline from April’s 261K. 

Stanley said a decline in multi-unit urban housing starts more than offset an increase seen in single-detached starts.

“While the May starts were soft, we note that m/m volatility has become increasingly common for this indicator, with actual results beating or missing consensus by at least ten per cent in each of the last five months,” he said.

Atlas released its first quarter 2023 financials last month, reporting revenue down from $12.4 million a year ago to $9.6 million and adjusted EBITDA of $1.7 million compared to $3.0 million for the previous Q1.

The company said delay in a large order affected the quarterly topline, with the order now likely to factor into the Q2 and Q3. Atlas said it saw a slowdown in business in Ontario over the quarter, while business in BC and Manitoba remained robust.

Stanley said Atlas continues to have a strong balance sheet, with cash and equivalents of $16.2 million at the end of the first quarter and continuing positive free cash flow status.

“Having produced almost $8 million in trailing 12 months free cash flow, AEP is well positioned to support further acquisition activity and/or additional stock repurchases under its NCIB,” Stanley said.

On a comps basis, Stanley estimates AEP to be currently trading at 4.1x his 2024 EV/adjusted EBITDA forecast, which represents a 55 per cent discount to the 9.1x average of its closest peers.

The analyst reiterated a “Buy” rating and $1.75 target on AEP, which at press time represented a one-year projected return of 72 per cent.

“From a technical perspective, the stock is now testing the uptrend on its daily chart, which could represent strong support,” he wrote.