ATS Automation Tooling Systems Inc

ATS Automation Tooling Systems Inc. (TSX: ATA) is an automation solutions provider. The Company is engaged in planning, designing, building, commissioning and servicing automated manufacturing and assembly systems, including automation products.

Key highlights

• Robust Order Backlog:The Company’s Order Backlog includes several large enterprise programs that have a long gestation period, therefore longer revenue recognition cycles. The company reported a backlog of CAD 956 million, higher than CAD 945 million in Q2 FY20. Higher-Order Bookings was primarily driven by the rise in order backlog in the life sciences and consumer products markets. In the third quarter of fiscal 2021, management expects the conversion of Order Backlog to revenues to be in the range of 35% to 40%.

• Reduced long term debts: The company managed to reduce its long-term debts in Q2 2021, by CAD 267.5 million to CAD 330.4 million against CAD 597.9 million on 31^st March,2020.
• Healthy Liquidity: The Company expects that continued cash flows from operations, together with cash and cash equivalents on hand and credit available under operating and long-term credit facilities, would be sufficient to fund its requirements for investments in non-cash working capital and capital assets; and fund strategic investment plans including some potential acquisitions. At present, the company hold CAD 162.6 million under its cash balance and CAD 816.2 million under its consolidated credit limit. 

Financial overview of Q2 2021 (in thousands of Canadian dollars)

Source: Company

• In Q2 2021, the Company reported revenue of CAD 335.5 million, compared to CAD 341.2 million in the previous corresponding period. The fall in revenue was primarily due to lower revenue from services rendered and Sale of goods segment.
• EBIT stood at CAD 23.4 million in the reported quarter, as compared to CAD 31.8 million in Q2 2020, primarily due to restructuring expenses.
• The Company posted Net Income of CAD 11.6 million in Q2 2021, as against CAD 19.4 million in the previous corresponding period.

Risks associated with investment

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 delay in the payment activities by the clients, which might act as a major setback to working capital management.

Valuation Methodology (Illustrative): EV to EBITDA

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

Stock recommendation

Over the long term, the Company expects to continue increasing its overall investment in non-cash working capital to support the growth of its business. The Company’s goal is to maintain its investment in non-cash working capital as a percentage of annualized revenues below 15%. The Company caters to a unique segment, and the demand for medical instruments is likely to remain robust. The Company managed to curtail its long-term debts and enjoy a healthy balance sheet. Therefore, based on the above rationale and valuation, we have given a “Hold” rating at the closing price of CAD 22.65 on December 17, 2020 with a single-digit (percentage term) upside potential. We have considered AutoCanada Inc, Stella-Jones Inc, Toromont Industries Ltd, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Copper Mountain Mining Corp

Copper Mountain Mining Corp (TSX: CMMC) is a copper producer, developer and explorer. The company’s flagship asset is the Copper Mountain mine located in southern British Columbia near the town of Princeton.

Key highlights 

• Robust production with lower cash cost: The company has shown resilience in maintaining its production. In Q3 2020, production was 23.8 million pounds of copper equivalent (comprised of 18.9 million pounds of copper, 6,630 ounces of gold, and 81,418 ounces of silver). On the back of some prudent steps taken by the management, the company brought down the cost. The cash cost for Q3 2020, was CAD1.27/lb copper produced, (AISC) was USD1.43/lb copper and all-in cost (AIC) was USD1.68/lb copper. This drop-in cost resulted in healthy margins.

Source: Company 

• Improving financial health: The company is entirely focused on improving its financial health. For this, the management took some prudent steps to curtail the expenses, which is helping them to achieve enhanced margins.Cash flow from operations (before working capital changes) for Q3 2020, stood at CAD 47.0 million as compared to negative CAD2.1 million in Q3 2019. Cash and cash equivalents also increased by CAD24.6 million to CAD 53.6 million in Q3 2020. 

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the company posted revenue of CAD 95 million, as against CAD 62.7 million in the previous corresponding period. Revenue increased significantly because of increased sales and higher metal prices, including a positive mark to market and final adjustment on concentrate sales of CAD 11.3 million.
• Cost of sales in Q3 2020, stood at CAD 53.0 million as compared to CAD 64.1 million in Q3 2019. The company witnessed a decrease in the cost of sales because of its cost savings initiatives resulting from the revised operating plan, which included utilizing less equipment.
• Net income in the reported quarter stood at CAD 33.2 million, as compared to a net loss of CAD 10.6 million in the previous corresponding period. Increased sales and higher realized metal prices were the reasons behind this turnaround. 

Risks associated with investment

The company’s financial performance is mostly dependent on the price of copper and gold, which directly affects the company’s profitability, margins and cash flows. The prices of these commodities are subject to volatility. It is affected by various factors, such as the strength of the US dollar, Interest rates, Inflation rates, demand and supply, all of which are beyond the company’s control. 

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

The Company came out with robust growth in top-line as well as in bottom-line. The company is also focusing on improving its financial health, where it increased its cash balance to CAD53.6 million. We also expect that the improvement in copper prices is likely to benefit the Company’s performance in the near to medium term. Further, copper prices are likely to remain stable as most of the governments across the globe eased the lockdown restrictions, which is expected to result in the resumption of the industrial activities. Therefore, based on the above rationale and valuation, we have given a ‘Hold’ rating at the closing price of CAD 1.68 as on December 17, 2020. We have considered Capstone Mining Corp, Lundin Mining Corp, Trevali Mining Corp etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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