|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.
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:
- Grow organically aided by positive fundamentals in their core housing markets (especially Vancouver Island, their #1 market)
- Acquire other truss operations at attractive valuations
- 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: