Bulletin #129


Smallcap Discoveries:

Financing Opportunity. 

Atlas Engineered Products

ATLAS ENGINEERED PRODUCTS

AEP-TSX V /APEUF:PINK

 

NOTICE: THIS COMPANY IS CURRENTLY CONDUCTING A PRIVATE PLACEMENT. WE ARE PARTICIPATING AND HAVE ARRANGED AN OPPORTUNITY FOR SCD SUBSCRIBERS TO PARTICIPATE AS WELL.

 MINIMUM $3000

IF YOU ARE AN ACCREDITED INVESTOR AND INTERESTED IN PARTICIPATING, PLEASE CONTACT:

Brittany Ray-Wilks 

brittany.ray-wilks@atlasaep.ca

1-250-480-9400

One of our top ideas, Atlas Engineered Products (AEP.V / APEUF:PINK) is conducting a private placement.

While as shareholders we are disappointed the company couldn’t raise at higher prices, we are participating in a very meaningful way. Here’s why:

  • The financing will de-risk the company by strengthening the balance sheet
  • Growth should accelerate through acquisitions
  • Insiders are participating
  • The price and offering are too good to ignore

And perhaps most importantly, management has proven they can drive shareholder value by growing both revenue and earnings per share.

We believe it’s only a matter of time before this company’s execution and profitable growth model are fully valued by the market.

We’ll now provide an overview of the company and deeper dive into the opportunity.

Overview

Atlas Engineered Products (AEP.V / APEUF:PINK) manufactures wood trusses and other engineered wood products (EWPs). Trusses are the wood beams that support a roof in a building. It’s a good-ole industrial. Something Warren Buffet could get excited about.

Atlas looks like a commodity business at first-glance. But dig deeper, and you’ll find a high return on capital business – all created by geographies. Large wood trusses are extremely expensive to ship and outside of a 100 mile radius, it doesn’t make economic sense.

This is why truss companies tend to enjoy regional monopolies. And it’s why instead of setting up new plants to compete, it makes more sense to acquire them. Which takes us to Atlas’s growth strategy:

  1. Grow organically aided by positive fundamentals in their core housing markets (especially Vancouver Island, their #1 market)
  2. Acquire other truss operations at attractive valuations
  3. Leverage purchasing power and shared resources (like project design) to improve margins and grow sales of acquired companies

The truss industry provides a unique opportunity for AEP to become the “acquirer of choice” and solve the industry’s succession problems. The industry is fragmented, and most targets are too small for private equity or VCs. Plus, it’s a boring business – the owner’s kids often aren’t lining up to take it over. It’s a lot like the funeral home business that Peter Lynch famously made fortunes investing in.

Atlas is raising $4,250,000 through a common share unit offering at $.40 to strengthen their balance sheet in anticipation of future acquisitions. As per their press release issued this week:

The offering will consist of up to 10,625,000 units at a price of 40 cents per share. Each unit will consist of one common share of Atlas Engineered plus one non-transferrable common share purchase warrant. Each whole warrant will entitle the holder to purchase one additional common share at a price of 60 cents per share for a period of two years from the date of issuance.

The net proceeds of the offering will be used for potential acquisition targets identified by the company, general working capital and capital equipment upgrades.

Let’s now review AEP’s strategy and financials and explain why we see big upside in this opportunity.

Financials / Valuation

Since coming public in November 2017, Atlas has completed 5 acquisitions:

The company has demonstrated that it can properly select acquisition targets, improve their operations and grow sales organically. By doing this, AEP’s acquisition strategy has had an outsized impact on both revenues and EBITDA as seen from the last quarterly financials:
And by staying disciplined and making acquisitions at attractive prices, all dilution incurred to fund this strategy has been more than offset by growth and margin expansion. We see that in the two most important metrics to monitor with any roll-up strategy: revenue and profit growth per share:
Year-over-year, Atlas has grown revenues per share by 45% and EBITDA per share by over 200%. They have done that by buying at attractive prices and using creative tools like asset-backed financing. This execution history validates their business model and increases the possibility of more of the same with any additional acquisitions.

The proposed private placement, if completed, will increase the fully diluted share count by almost 40%. By January 2020, management is targeting a $50 million run-rate with 15% EBITDA margins. If they accomplish that, both revenue and EBITDA per share will increase further – which in theory should drive shareholder valuation

AEP is not an expensive stock. And if they can hit their January target, the valuation gets even cheaper – 0.6X revenues and 4X EBITDA – even fully accounting for potential dilution from this private placement.

AEP is a cyclical business and may not deserve the multiple of a high growth software company. But 1X revenues or 6X EBITDA would be no stretch – and that gets you a share price around $0.60, 50% upside from the private placement.

Management has stated they see a clear path to a $100 million revenue run-rate. If they are successful at raising at higher prices – and thus minimizing dilution – our upside gets much, much higher.

So either the market does not appreciate the roll-up strategy and its ability to deliver value – or it’s spooked by market trends in the Canadian housing market.

We believe as this strategy continues to play out in the financials, the company will soon be too cheap to ignore. Atlas also operates in regions that have stronger housing dynamics than metro Vancouver and Toronto – and this should insulate them from the falling housing prices that are making the headlines.

We’re long AEP.V and participating in this financing.

To your wealth,

Paul & Brandon

Disclosure: Paul, Brandon, and Keith are long AEP.V