ATS Automation Tooling Systems Inc.

ATS Automation Tooling Systems Inc. (TSX: ATA) operates as an automation solutions provider and has premium clientele across the Globe. The group uses its extensive knowledge base and global capabilities in custom automation, repeat automation, automation products and value-added services.

Recent Update:

• The company informed its plan to sale its German-based subsidiaries to a third party in order to lower its costs as per the previously announced reorganization of its transportation business.
• Recently, the company informed that it had received a CAD 20 million order from a medical device manufacturer, wherein the company would design, build, and deliver several automated safety syringe manufacturing systems.

Q1FY21 Financial highlights: ATA announced its quarterly results, wherein the company posted revenue of CAD 324.9 million as compared to CAD 339.2 million in the previous corresponding period (pcp). The decline was primarily attributable to travel restrictions and temporary closures and entry restrictions at some customer sites. Meanwhile, on a segmental basis, revenues generated in life sciences increased 6% on y-o-y basis underpinned by short-duration mandates to help customers rapidly transition production to personal protective equipment and ramp-up production of critical life sciences products.  EBITDA stood lower at CAD 39.2 million compared to CAD 47.2 million in pcp, due to lower revenues and gross margin on account of lower after-sales services revenues and operational inefficiencies, while a decline in the selling, general and administrative expenses and stock compensation expenses supported the profitability. The company posted a lower net income of CAD 9.8 million compared to CAD 16.4 million in Q1FY20.

Q1FY21 Income Statement Highlights (Source: Company Reports)

Risks: Fluctuation in the foreign exchange rate may affect the performance as the Company’s Canadian operations generate significant revenues in major foreign currencies. Further, the company might not achieve the desired result from the reorganizing plan. In such a scenario, the company’s performance might affect adversely.

Valuation Methodology: EV/EBITDA Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock corrected ~18% so far this year. The company reported a decent topline amidst a challenging environment, which is impressive. The business received higher traction from the life sciences segment, wherein the company would design, build and delivery of automated systems for the production of COVID-19 point-of-care test kits. We expect the momentum to continue in the coming days. Order Bookings within the transportation, consumer products and energy markets remained subdued in the recent past, due to the temporary suspension of the CAPEX program of several manufacturers. With the resumption of manufacturing and industrial activities across the globe, we expect a revival in the order flow, which would support the company's future revenues and cash flows. The company is focusing on restructuring its business and decided to close several facilities and to reduce the workforce primarily in Europe and Asia in order to mitigate the expected impact of a downturn in its transportation business. The management stated that this action is necessary to align the capacity and cost structure of the business to current and expected conditions in the transportation market. The plan is expected to mitigate against future margin erosion and emerge to serve transportation customer opportunities that are aligned with the group's technologies, capabilities and objectives.  We have valued the stock using the EV to EBITDA based relative valuation approach and arrived at a target price, which suggests a lower double-digit upside potential (in % terms). For the said purpose, we have considered Toromont Industries Ltd, Stella-Jones Inc and Stantec Inc etc., as a peer group. Hence, considering the above factors, we recommend a 'Buy' rating on the stock at the closing price of CAD 17.60 on October 2, 2020.

ATA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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