AEP Stock is a buy, Beacon Securities says

The company’s second quarter results are in the books, and Beacon Securities analyst Russell Stanley remains bullish on Atlas Engineered Products. (Atlas Engineered Products Stock Quote, Chart, News, Analysts, Financials TSXV:AEP)

On August 29, AEP reported its Q2, 2023 results. The company posted Adjusted EBITDA of $2.05-million on revenue of $11.2-million, a topline that was down from the $16.8-million the company posted in the same period a year prior.

“I continue to be proud of the AEP team that produced another solid quarter, with relatively stable margins in spite of reduced material prices, continued interest rate hikes causing downward momentum in the construction sector and a overall more competitive market,” said Hadi Abassi, the company’s chief executive officer, president and founder. “We continue to work hard to ensure the company is moving forward with organic and acquisitive growth. We continue to believe that there is an ongoing need for more housing in Canada and we strive to be the partner of choice for contractors and homeowners during their construction projects.”

The analyst summarized the quarter.

“AEP reported Q2 revenue/adjusted EBITDA of $11.2M/$2.1M vs. our forecast of $11.0M/$2.2M. The only other forecast (per FactSet) contemplated revenue/adjusted EBITDA of $13.9M/$2.2M. We attribute the stock’s decline to a likely focus on the y/y revenue/EBITDA performance. Revenue was in line with our forecast, and down 33% y/y, reflecting the decline in lumber pricing as well as slower residential demand following the Bank of Canada’s tightening efforts. Revenue improved 16% q/q, which we attribute a seasonal pickup, with further growth expected in Q3. Reported Adjusted EBITDA margins were slightly below our forecast, though if AEP had added back the $192k in one-time costs (largely acquisition-related) that many other issuers would have, adjusted EBITDA would have been $2.2M, in line with expectations. AEP produced operating cash flow before working capital (OCF) of $1.6M during Q2, right in line with our forecast. With a higher-than-expected working capital investment in the quarter ($1.9M v. our forecast for a $0.5M release), cash from operations (CFO) was negative $0.4M v. our forecast for positive $2.1M. Notwithstanding the q/q volatility in CFO arising from working capital fluctuations.”

In a research update to clients August 29, Stanley maintained his “Buy” rating and one-year price target of $2.25 on AEP, implying a return of 88 per cent at the time of publication.

Stanley thinks AEP will post Adjusted EBITDA of $11-million on revenue of $54-million in fiscal 2023. He expects those numbers will improve to EBITDA of $23-million on a topline of $82-million the following year.

The analyst says AEP trades a 46 per cent discount to its closest peer.

“AEP now trades at 4.5x our F2024 adjusted EBITDA forecast,” he said. “This represents a 46% discount to the 8.3x at which Builders FirstSource trades. 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 further M&A activity, contract wins, and the Q3 results in November.”