Atlas: excellent forecast for 2022 and favorable estimates (NYSE: ATCO)
Atlas Corp. (NYSE: ATCO) recorded sales growth of more than 9% in the first quarter of 2022 and continues to report more and more ships. If shipping market trends continue to benefit the company and ATCO negotiates successfully with lending institutions, free cash flows will likely be northerly. In my opinion, if regulators don’t destroy ATCO’s free cash flow margins and covenants don’t infringe on the freedom of the company, the stock price could reach higher levels. Even considering the risks, I think ATCO’s research is a great idea for non-conservative investors.
Atlas Corp. invests in long-term risk-adjusted returns in infrastructure assets in the maritime sector and the energy sector. The company’s most relevant interests are in Seaspan Corporation, the world’s largest container lessor, and APR Energy, a mobile power solutions lessor.
Given Atlas’ different business models, the company’s core business appears to be container ship leasing. During the three months ended March 31, 2022, more than 94% of the total amount of revenue was related to the rental of container ships.
After the last quarterly release, Atlas turns out to be an interesting piece. The company recorded sales growth of 9.5% q/q and a significant increase in adjusted EBITDA. With more ships than in the first quarter of 2021, I think we could expect more free cash flow in 2022 than in 2021.
The advice given in the last presentation is also beneficial. In total, Atlas Corp. expects to generate nearly $1.1 billion in revenue in 2022, including APR revenue and Seaspan revenue:
Estimates include double-digit sales growth in 2023 and 2024
I consulted other analysts’ reports before running my financial models. Estimates issued by other analysts include sales growth between 2% and 20% from 2022 to 2024 as well as an EBITDA margin of 67% to 70%.
Investment analysts are also expected to almost double the total amount of net income in 2022 compared to 2021. In my opinion, only investors who take the time to assess future income will make a profit on the business.
As of March 31, 2022, Atlas Corp. reports $251 million in cash, $10 billion in total assets, and $6 billion in total liabilities. The financial situation seems stable, but a few words must be said about the total amount of debt.
As of March 31, 2022, Atlas Corp. reports long-term debt worth $3.59 billion and net debt of nearly $5.3 billion. I believe the leverage is not low. In my view, future revenue growth will likely help management reduce the total amount of debt. With this, investors, who do not appreciate a large financial risk, and a lot of financial obligations can pass on this name.
Under advantageous conditions in the shipping market, I obtained a valuation of $18 per share
In my base case scenario, I assumed that shipping and energy market trends would continue to benefit Atlas Corp. Also, more customers could know more about the accumulated know-how of Atlas Corp. .
Also, I assumed that Atlas Corp. will be able to borrow funds on acceptable credit terms. As a result, the company will be able to fund capital expenditures and other general business activities. Finally, changes in government rules or the effect of government regulations on Atlas’ business are unlikely to affect operations.
Experts estimate that the global container rental market is expected to grow at a CAGR of 6.1%. In this scenario, I assumed that sales growth will be a little lower than market growth. I included a sales growth of about 4% from 2025 to 2030.
In 2019, the global container leasing market size was USD 6032.9 million and is projected to reach USD 9173.3 million by the end of 2026, growing at a CAGR of 6.1% during the year. period 2021-2026. Source: Digital Journal
In this scenario, I considered sales growth reported by other analysts from 2022 to 2024. Additionally, I used an EBITDA margin of 67%, which I have seen in the past. In fact, he is conservative. My results include 2030 operating profit close to $1 billion and 2030 EBITDA of $1.51 billion.
Now, with conservative changes to working capital, D&A, and investment/sales of 51%, free cash flow in 2030 would be $279 million.
In my CAPM model, I used a discount of 6.3%, with a beta close to 1.68 and a cost of equity of 10% to 14%. Other investment analysts have used similar assumptions. In total, with an EV/EBITDA multiple of 9.4x, the implied fair price would be close to $18, and the internal rate of return could be between 7% and 8%:
worst case scenario
Atlas Corp. has signed several contractual agreements, which may limit the options available for management. This means the company may not be able to commit to aggressive acquisitions or new financing deals. Accordingly, Atlas Corp. may generate less revenue than expected. The company explained some of these covenants in the annual report:
To borrow funds under our existing credit facilities and vessel leasing and other financing arrangements, we must, among other things, comply with specific financial covenants. For example, we are prohibited under certain of our existing credit facilities, vessel leases and other financing agreements from incurring aggregate borrowings in excess of 65.0% of our total assets (as defined in the applicable agreement), and we must also ensure that certain interest coverage and interest and principal coverage ratios are met. Source: 20-E
Atlas Corp. made great efforts to increase the number of customers. In the last investor presentation, Atlas offered significant customer diversification. With that, in the last annual report, the company listed a significant number of risks stemming from customer concentration. In this scenario, I assumed that Atlas Corp. could lose one or two customers, which could lead to a significant drop in revenue growth:
We derive our charter revenue from a limited number of customers, and the loss of a customer or the long-term charters we have with them, further increases in the number of short-term charter vessels or any significant decrease in payments under our contracts with customers could materially adversely affect our business, results of operations and financial condition. Source: 20-E
As part of the growth strategies reported by Atlas, there is inorganic growth. I am not optimistic in this regard. In my opinion, even if management finds targets, they will most likely be small because Atlas Corp. does not have a large amount of cash and the leverage is not low:
We expect acquisitions of new assets and businesses to be an important part of our growth strategy. If we are unable to identify suitable acquisition candidates or successfully integrate the businesses or assets we acquire, our growth strategy could fail. Source: 20-E
In a hypothetical pessimistic scenario, I used -35% sales growth in 2025 and 2.5% sales growth from 2026 to 2030. Additionally, with a decline in EBITDA margin from 2025 to 2028, I got a 2030 EBITDA of about $1.31 billion.
I used a discount of 6.75% and an exit multiple of 8.5x, which implied a price of $5 and an IRR of -6%.
My best-case scenario with enough M&A deals involved a $37 valuation
My best case scenario includes approximately the same trading conditions as reported in my base case scenario. However, I also assumed that management would be able to acquire many other competitors, which will likely improve future revenue and free cash flow growth. Keep in mind that sales growth will outpace that of the target market. This scenario is a bit unlikely. He assumes that Atlas will present some small acquisitions, which could be so beneficial that creditors could help management with more financing. In my opinion, the case is a bit extraordinary because the total amount of leverage is not small.
Atlas Corp. disclosed in its annual report that it was seeking to acquire other competitors. With that in mind, not designing a case scenario where management acquires other peers would be a bit unfair:
We intend to seek acquisition opportunities both to expand into new business areas and to strengthen our position in our existing business areas. This may involve acquiring new businesses, assets to contribute to our existing business lines, including new or used vessels and power generation assets, or both. Source: 20-E
In this case, from 2025 to 2030, I assumed sales growth of around 7.5% to 5%, an EBITDA margin close to 70% and an operating margin of 45%. The results include a 2030 operating profit of $1 billion.
With a discount of 5% and an optimistic exit multiple of 12.5x, the implied price would equal $37, and the IRR would be close to 30%.
Atlas Corp. recorded sales growth of more than 9% in the first quarter of 2022, and many investment analysts expect double-digit sales growth in 2023 and 2024. In my opinion, if the market trends of the shipping and energy continue to hold up and as Atlas continues to increase its ships, free cash flow will likely shift north. At best, I think the company could fetch a fair price of over $30. Even given the risks of existing deals and the total amount of debt, in my view, Atlas will likely be appreciated by non-conservative investors.