ATS Corp still a Buy, says Stifel

Stifel analyst Justin Keywood likes the new tuck-in acquisition made by Canadian automation solutions provider ATS Corp (ATS Corp Stock Quote, Charts, News, Analysts, Financials TSX:ATS), saying in a Wednesday note to clients that the move will help increase ATS’ after-market business, an area in which the company has lots of room to grow.

Cambridge, Ontario-based ATS Corp announced on Wednesday the purchase of Belgium-based Yazzoom, a provider of artificial intelligence and machine learning-based tools for industrial production. The company uses data analytics and smart machines to improve customers’ production processes and has a number of multi-billion dollar market cap clients including Chevron, First Quantum Minerals and Sappi.

“Yazzoom broadens our process optimization and digitalization capabilities in key focus sectors,” said Dr. Christian Debus, President of ATS’ Process Automation Solutions (PA) business, in a press release. “Their strong expertise in advanced data analytics and AI and ML-based software solutions can be offered to our existing customers to add value to our current platform and domain knowledge. We are looking forward to welcoming the Yazzoom team to PA.”

Keywood said the tuck-in shows ATS’ determination to develop its lucrative after-market services business.

“We see the acquisition as directionally positive as it highlights a focus on ATS’ after-market services offering that has higher margins and becoming a larger portion of sales, along with adding new software & technology,” Keywood wrote.

As to future M&A, Keywood said ATS’ balance sheet looks strong after its US$283 million IPO in the US in May. The analyst has ATS’ net debt at $680 million with 70 per cent fixed at a 4.125 per cent coupon to 2028 and net debt/EBITDA of about 1.8x.

Keywood maintained in his update a “Buy” rating on ATS and $75 target price, which at press time represented a projected one-year return of 22 per cent.

Regarding his investment thesis on ATS, Keywood said the company has a strong secular trend in its favour in the on-shoring movement where vulnerabilities revealed in supply chains will benefit the company. He sees margin expansion potential in after-market business and sharing system designs, for instance, and pointed to more M&A potential for the company, while also noting some high-valued verticals ATS is targeting such as diabetes, contact lenses, cancer & cardiovascular therapies and electric vehicles.

“ATS trades at 14x Fwrd EBITDA versus peers at 15x. ATS’ after-market services revenue has increased from 12 per cent to ‘high-teens’ since 2017. The industry average for after-market services is near 30 per cent, suggesting a further expansion opportunity,” Keywood wrote.