ATS Automation Tooling Systems Inc.

ATS Automation Tooling Systems Inc. (TSX: ATA) is a Canada-based company that provides automation systems. The company designs and builds customized automated manufacturing and testing systems for customers and provides pre and post-automation services.

Key Updates:

• Update on Latest Order Received: The group reported addition of new order from Holtec International during Q3FY21, wherein the group would build and test specialized tooling equipment to support the decommissioning of retired nuclear plants in Holtec's U.S. based fleet. The above equipment is required safe and efficient decommissioning of a nuclear power plant and will be tested underwater at ATS' full-scale mock-up test facility and is expected to be delivered within the next nine months.

• Significant Reduction of Debt: The company reported a significant reduction of debt and reported total debt of CAD 316.093 million at the end of Q3FY21, as compared to CAD 598.098 million in FY20. A reduction in the debt was supported by solid growth in cash flows and bolstered the group’s financial health.

• Diversified Revenue Base: The group has a diversified revenue base in terms of geography and operations, which minimizes risk due to lower dependence on a single segment. The group derives ~60% of Revenue from Automation & Integration Solutions, ~30% and ~10% from Services and Products & Components segments, respectively.

Customer Base Snapshot (Source: Company Presentation)

Q3FY21 Financial Highlights:

• ATA announced its third-quarter result, wherein the company posted total revenues of CAD 369.731 million, as compared to CAD 367.185 million in the previous corresponding period (pcp). The slight increase was driven by improved revenue from the Life sciences segment and a solid growth from Consumer products, partially offset by considerably lower revenue from the Transportation segment.

Revenue Bifurcation (Source: Company Report)

• Earnings from operations soared to CAD 32.273 million, from CAD 10.351 million in pcp. The group reported a lower cost of revenues (CAD 267.028 million versus CAD 274.985 million in pcp), significantly lower Restructuring costs (CAD 6.208 million versus CAD 18.797 million in pcp) and a slightly higher Selling, general and administrative (CAD 59.331 million versus CAD 58.508 million in pcp).
• Net income stood at CAD 18.890 million, significantly higher than CAD 4.073 million in Q3FY20.
• The group reported cash and cash equivalents of CAD 224.544 million, while total assets were recorded at CAD 1,905.510 million.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: The group’s performance might be hindered due to the slowdown in the orderbook on account of unfavorable macros scenario, risk from currency fluctuations, rise in raw material prices.

Valuation Methodology (Illustrative): Price to Cash Flow

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock Recommendation:

The products offered by the company are unique in nature and have entry barrier on account of regulated environments, technological know-how etc. This provides competitive advantage to sustain the company’s market share. Moreover, the group is focusing on strengthening its product portfolio and also enhancing its geographic presence through strategic collaborations and acquisition. ATA is prioritizing on improving operational efficiency through improved supply chain management, better after-sales service for better customer satisfaction, standardization of products etc. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered industry (Industrial) median on NTM basis etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 28 on March 11, 2021.

1-Year Price Chart (as on March 11, 2021). Source: Refinitiv (Thomson Reuters).

NFI Group Inc.

NFI Group Inc. (TSX: NFI) is a Canadian automobile manufacturer, and operates through two segments: Manufacturing operations, and Aftermarket operations. Manufacturing operations derives the major revenue and is focus on the manufacture of transit buses for public transportation and motor coaches.

Key Updates:

• Impressive Guidance: For FY21, the group provides healthy guidance and expects revenue within the range of USD 2.8 billion to USD 2.9 billion, higher than the revenue of FY20 (USD 2.4 billion). The improvement is expected through market recovery in NA Bus and Coach and UK transit, persistent growth of ARBOC in cutaway and medium-duty markets and the company’s expansion in Europe and APAC regions. The group expects its Adjusted EBITDA within USD 220 million to USD 240 million, while capex is expected at ~USD 50 million, which includes ~USD 35 million for maintenance.
• Improved Liquidity: Despite a slowdown within the Automobile market, the company reported higher liquidity of USD 233.5 million at the end of Q4FY20, up USD 24.2 million from Q4FY19. Furthermore, the group has USD 1.25 billion of senior revolving credit facility and £50 million revolving UK credit facility, which seems sufficient to withstand the current challenging time.

FY20 Financial Highlights:

• NFI announced its full-year result, wherein the company posted revenue of US 2,419.175 million as compared to USD 2,893.436 million in the previous corresponding period (pcp). The decline was primarily attributable to a significantly lower Manufacturing Revenue due to the idling of production facilities in the second quarter of FY20.

FY20 Revenue Bifurcation (Source: Company Report)

• Gross profit stood at USD 199.255 million, as compared to USD 413.482 million in pcp.
• The quarter was marked by lower Sales, general and administration costs and other operating expenses (USD 231.303 million versus USD 241.454 million in pcp), along with an Impairment loss on goodwill amounting to USD 50.790 million. Loss from operations stood at USD 81.329 million, as compared to earnings of USD 173.064 million in pcp.
• Net loss stood at USD 157.736 million, as compared to a net profit of USD 57.698 million in pcp.
• The group reported a cash balance of USD 55.769 million, while total assets were recorded at USD 2,755.915 million.

FY20 Income Statement Highlights (Source: Company Report)

Risks:  The company’s performance is directly correlated to the international automobile market. Several instances like new restrictions imposed due to the fresh spread of the virus, fluctuation in the raw material prices, currency volatility etc., may dampen the company’s overall performance.

Valuation Methodology (Illustrative): Price to CF based

Note: All forecasted figures and peers have been taken from Thomson Reuters

Stock Recommendation:

During FY21, the company would launch new battery-electric buses and coaches, fuel-cell electric double deck in the UK, North America’s first Level 4 automated transit bus and medium-duty battery-electric bus to take the advantage of the growing market, which is a key positive. The management expects that FY21 would likely to remain as a transition year, while growing demand is expected from government stimulus. We have valued the stock using the Price to CF based relative valuation method and have arrived at a single-digit upside (in percentage terms). For the said purposes, we have considered peers like TFI International Inc, Uni-Select Inc and Boyd Group Services Inc etc. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing market price of CAD 30.25 on March 11, 2021.

One-Year Price Chart (as on March 11, 2021). Source: Refinitiv (Thomson Reuters)

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