2023-03-16 14:35:37 ET
Summary
- Atlas Engineered Products focuses on buying profitable companies in the truss and engineered wood products industry that have gaps in the business succession plan.
- Revenues and income have been growing rapidly and Atlas Engineered Products is trading at just 3.9x EV/EBITDA.
- In addition, the company is in a strong position to fund two or three more acquisitions as its cash and cash equivalents stood at $9.4 million is September.
- However, I’m concerned that housing starts in Canada have been declining over the past few months and that financial results for 2023 could be underwhelming.
Introduction
As I mentioned in my article about Supremex ([[SUMXF]], [[SXP:CA]]) here , I've been looking for value stock investment opportunities in Canada lately. Today, I want to talk about Atlas Engineered Products ([[APEUF]]) ( AEP:CA ) which is a rapidly growing compounder in the construction sector. It was named the second top performing stock on the TSX Venture Exchange in the Diversified Industries sector in 2022 but I think momentum could be lost soon. As I explained in my latest article about US property developer Landsea Homes ( LSEA ), the residential property market seems to be slowing down significantly. In my view, 2023 is likely to be challenging for Atlas Engineered Products due to low levels of housing starts in Canada. Let’s review.
Overview of the business and financials
Atlas Engineered Products was founded in 1999 and it specializes in the acquisition of well-established small companies in the truss, wall panels, and engineered wood products industry in Canada. Atlas Engineered Products has a significant exposure to the wood-framed buildings sector and about three quarters of its revenues come from trusses. A wood truss represents a structural frame that relies on a triangular arrangement of shorter lengths of lumber. The main clients of Atlas Engineered Products include developers of residential and commercial wood-framed buildings, including single-family homes, townhouses, multi-story wood-framed residential buildings, commercial buildings, and agricultural structures. The company currently has manufacturing and distribution facilities in British Columbia, Manitoba, and Ontario. It listed on the TSX in late 2017 through a reverse takeover transaction with Archer Petroleum Corp and it has acquired a total of seven companies since then, namely Coastal Windows (now Atlas Building Systems), Pacer Building Components, Clinton Building Components, Satellite Building Components, South Central Building Systems, Novum Building Components, and Hi-Tec Industries.
The roll-up acquisition strategy of Atlas Engineered Products focuses on profitable companies in the truss and engineered wood products industry with annual revenues of between C$3 million ($2.2 million) and C$15 million ($10.9 million) that have gaps in the business succession plan. Looking through the acquisition history, Atlas Engineered Products hasn’t paid over C$10 million ($7.3 million) in a single transaction to date. The payment consideration often includes an equity component and the company has paid on average about 4x EBITDA for these acquisitions.
With these purchases, Atlas Engineered Products aims to make its business more efficient by expanding its geographic footprint and product offering as well as lowering operating costs by introducing scale economies in procurement. According to the latest corporate presentation , the EBITDA margins of the acquired businesses usually see a significant improvement following their integration into the group.
It’s a fragmented industry with several thousand small family-run businesses and there are over small 200 truss manufacturers in Canada. In my view, the roll-up acquisition strategy of Atlas Engineered Products seems to be working well so far as the revenues and earnings of the company have been growing rapidly over the past few years.
On February 22, Atlas Engineered Products released its preliminary financial results for 2022 and they showed that revenues for the year are expected to come in at C$61.8 million ($45.1 million). This represents an annual growth of 12.3% and the audited financial results for 2022 are expected to come out before the end of April. Considering the EBITDA margin was 25% for the first nine months of 2022, I think that the EBITDA for the full year could surpass C$15 million ($11.9 million).
Turning our attention to the balance sheet, I think that Atlas Engineered Products is in a strong position to fund two or three more acquisitions as its cash and cash equivalents stood at C$12.9 million ($9.4 million) as of September 2022. Net debt was just C$1 million ($0.8 million) at the end of the quarter which puts the enterprise value at C$58.8 million ($42.9 million) as of the time of writing.
If we assume that EBITDA for 2022 was about C$15 million ($11.9 million), Atlas Engineered Products is currently trading at about 3.9x EV/EBITDA as of the time of writing. While this ratio is low and is in line with the prices Atlas Engineered Products has been paying for acquisitions over the past few years, I think this is likely a bad time to open a position.
You see, housing development is a cyclical industry and the major risk for the bull case is a prolonged period of low housing starts in Canada. With rising interest rates sapping mortgage demand in the country, this is precisely what seems to be taking place at the moment. According to data from the Canada Mortgage and Housing Corporation, the trend in housing starts in the country was 255,735 units in February 2023, which represents a decline of 1.6% compared to the January levels. Among Toronto, Montreal and Vancouver, only Toronto had an increase in the total seasonally adjusted annual rate of housing starts in February.
Considering the Bank of Canada still hasn’t pivoted, I think that the next several months are likely to be challenging for housing developers in the country. In my view, this is likely to put pressure on the share price of Atlas Engineered Products in the near future.
Investor takeaway
Atlas Engineered Products has grown rapidly over the past several years thanks to the purchase of several mom-and-pop wood truss companies. In my view, Atlas Engineered Products has not been overpaying as it paid only around 4x EBITDA on average and the acquired businesses usually see significant margin improvement after that. The company has a strong balance sheet and I think it could easily fund at least two or three more acquisitions with its high cash balance. That being said, I’m concerned that housing starts in Canada have been declining over the past few months due to rising interest rates and that financial results for 2023 could be underwhelming. Overall, I think that Atlas Engineered Products has a sound roll-up acquisition strategy and I plan to put it on my watchlist, but it just seems like a bad time to open a position at the moment. I think that it could be best for risk-averse investors to avoid this stock for the time being.
For further details see:
Atlas Engineered Products: Sound Acquisition Strategy But 2023 Could Be Challenging