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.

Recently, the company reported the sale of certain assets and the transfer of employees from one of its German-based subsidiaries.

Key Positives:

• The company’s life sciences funnel remains robust, as this segment supplies medical devices, related to the COVID-19 pandemic. Furthermore, within the transportation segment, the management expects various strategic opportunities related to new technologies. We believe, ATA is highly poised to redeem the upcoming opportunities from the same industry.
• The company reported a backlog of CAD 956.0 million, higher than CAD 909.0 million and CAD 945.0 million in Q1FY21 and Q2FY20, respectively. Higher backlog indicates higher future revenues. The company has maintained an elevated backlog level, despite a soft economic scenario, which signifies operational resiliency. Furthermore, the company has reported order bookings of CAD 403.0 million, significantly higher than CAD 325.0 million in Q1FY21.
• At the end of Q2FY21, the company has reduced its Long-term debt to CAD 330.453 million, from CAD 597.965 million in FY20. Long-term lease liabilities also reduced to CAD 42.470 million in Q2FY21, from CAD 47.209 million in FY20. Reduction in the long term-debt augurs well for lower interest costs.

Q2FY21 Financial Highlights:

• Total revenue stood at CAD 335.532 million, slightly lower than CAD 341.234 million in the previous corresponding period (pcp). The marginal decline was primarily attributed to lower revenue from Services rendered and Sale of goods segments, partially offset by higher income from Construction Contracts segment.
• Earnings from operations stood relatively lower at CAD 23.425 million, against CAD 31.755 million in the previous corresponding period (pcp), due to inclusion of restructuring expense.
• Net income stood at CAD 11.625 million, as compared to CAD 19.369 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Reports)

Risk: Due to the tepid economic scenario, the business might witness a reduction in the order book, which might lead to lower revenue. The existing macro challenges might lead to a delay in the payment activities by the clients, which might act as a major setback to working capital management.

Valuation Methodology: P/E Based (Illustrative)

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

Stock Recommendation: The stock of ATA corrected ~11.6% so far this year amidst a demand destruction scenario across the globe. However, its shares have significantly outperformed the benchmark index on a YTD basis and in the past 3 Months and 1 Month, which implies relative strength in the stock. Also, the stock was hovering above the crucial short-term and long-term support levels of 50-day and 200-day SMAs, which implies a bullish price trend in the stock. The company caters to a unique segment, and the demand for medical instruments is likely to remain robust. Thus, we expect a stable top-line performance in the foreseeable future. We have valued the stock using P/E -based relative valuation method and arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Ritchie Bros. Auctioneers Inc, Stella-Jones Inc etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 18.95 on November 05, 2020.

1-year Price Chart (as on November 05, 2020, after the market close). Source: Refinitiv (Thomson Reuters)

Bausch Health Companies Inc

Bausch Health Companies Inc (TSX: BHC) operates in developing, manufacturing and distributing a range of pharmaceutical, medical device and over-the-counter products, in the therapeutic areas of eye health, gastroenterology and dermatology.

Recent Highlights

Recently, the company announced that the U.S. Food and Drug Administration (FDA) has granted Orphan Drug Designation to rifaximin for the treatment of sickle cell disease.

Key Highlights:

• Higher Operational Efficiency: The company has implemented certain cost-saving strategies and has successfully reduced its cost by ~USD 100 million, reflecting ~13% savings in Q3FY20, from Q3FY19, which augurs well for margin-improvement. Selling, A&P reduced by ~11% y-o-y basis, while Adjusted G&A and R&D declined by 17% and 16%, respectively. Operating income stood higher at USD 460 million in Q3FY20, as compared to USD 329 million in Q3FY19.

Q3FY20 Costs Reduction Snapshot (Source: Company Presentation)

• Strong Liquidity and Prudent Capital Management: The company has solid cash flows and expects its FY20 cash from operations at ~USD 1 Billion, looks healthy. Furthermore, the group has reduced its debt by ~USD 100 million in Q3FY20 and ~USD 420 million during the first nine months of FY20 through its cash flows, which is commendable. Lower debt level augurs well for lower interest costs. Moreover, the corporation has no debt maturities or mandatory amortization payments until 2023, which is a key positive too.
• Strong Product-pipeline to drive Growth: BHC expects a stable revenue and adjusted EBITDA growth in its foreseeable future, driven by an impressive product pipeline, which is expected to launch between the fourth quarter of FY20 to FY21. The company’s topline is expected to improve by 3%-5% CAGR during FY19 to FY22, while adjusted EBITDA is expected to grow at 4% to 7% during the same time frame.

Revenue Estimates (Source: Company Presentation)

Adjusted EBITDA Estimates (Source: Company Presentation)                   

Expected Product-pipeline (Source: Company Presentation)

Q3FY20 Financial Highlights:

• The company reported its top-line at USD 2,138 million, as compared to USD 2,209 million in pcp. The decline was primarily attributed to a ~10% y-o-y decline from Salix, while a stable Bausch + Lomb/International segment supported the income.
• Adjusted EBITDA stood at USD 469 million, reflecting a growth of 10% on y-o-y basis.
• The company reported its net income at USD 71 million, as compared to a net loss of USD 49 million in the previous corresponding period (pcp).

Q3FY20 Income Statement Highlights (Source: Company Reports)

Revenue Bifurcation:

    Segment-wise Revenue (Source: Company Reports)

Risks: The products are categorized under the premium segment and cater to a particular section only, and a reduction in consumer spending could weigh on the sales volume.

Valuation Methodology: Price to Earnings Based (Illustrative)

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

Stock Recommendation:

After a sluggish second quarter, the group witnessed improved traction from the consumer and resulted in revenue growth from Bauch+Lomb at 32% on q-o-q basis, while brands like XIFAXAN® and TRULANCE® grew by 21% and 29% o q-o-q basis. Furthermore, the company saw a strong momentum within its e-commerce segment, which registered a y-o-y growth of more than 100% on in 9MFY20. Going forward, we expect a revival in the sales volume, aided by strong brand-positioning and an attractive product pipeline. We have valued the stock using P/E -based relative valuation method and have arrived at a target upside of lower double-digit (in percentage terms). For the said purposes, we have considered peers like Mylan NV, Biogen Inc etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 21.86 on November 5, 2020.

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

Disclaimer

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