-- CIBC Capital Markets on Thursday maintained its Outperformer rating and C$72 price target on the shares of ATCO (ACO-X.TO) after hosting a fireside chat with Adam Beattie, President of ATCO's Structures and Katie Patrick, Chief Financial Officer and Chief Investment Officer of ATCO Ltd., to discuss ACO's Structures & Logistics (S&L) business. The bank said it had also done a "deeper dive" on S&L, and ATCO remains "a top pick".
CIBC said that, overall, the company update reinforced its "constructive view" on S&L given multiple policy/industry tailwinds that should help drive durable and more diversified growth.
"That said," it added, "ACO.X's commentary alone may not be sufficient to sway the marginal buyer of the stock -- limitations on disclosures could temper near-term re-rating potential despite a favourable demand backdrop and solid execution to date."
CIBC said multiple tailwinds support a "positive outlook", noting that S&L benefits from multiple demand drivers, including Canada's support for large infrastructure projects (energy export buildout), rising defence spending, mineral extraction activity, and growing commercial and residential housing needs. "Modular housing could become more meaningful -- we believe ACO.X should be competitive in the Canadian military housing tender (strong history of serving defence) in the next year," the bank added.
CIBC further noted that, in the U.S., there's "material runway to scale and grow" into new regions/markets as reshoring and the data centre buildout drive demand. It noted there are also strong data centre tailwinds in Australia.
"Data centres were flagged as increasingly attractive given improving economics and longer rental durations (typically 36-48+ months vs. 6-36 months for traditional rentals)," said CIBC. Currently holding only about 2% U.S. market share (representing 15% of S&L revenue), ATCO is well positioned to expand in this end market, the bank added.
CIBC noted that ATCO emphasized that industrial (infrastructure, construction, resources) should continue to provide a "resilient, high-margin earnings base", while commercial and residential modular growth "should accelerate (off a smaller base)". CIBC said while margins in the latter will be lower near term, it said it does not expect material EBITDA margin contraction for S&L, with top line growth supporting earnings growth. "Further, we do not expect a step up in capex to support this growth (should remain in line with recent levels), and the strong growth can largely be leveraged off existing manufacturing capacity," added CIBC. "Trailing 3-year CAGRs (2022-2025) for revenue/EBITDA are 11%/26%."
CIBC forecasts 3-year CAGRs for 2025-2028E for revenue/EBITDA of 8%/9%. It added that its revenue forecast could be conservative.
CIBC noted ATCO reiterated its view that S&L is undervalued at current prices which is a view the bank shares. CIBC believes "enhanced disclosures (e.g. a backlog or explicit revenue/margin targets) could help", but noted ACTO seems reluctant to provide.
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