ATS acquires UK-based yield control and recipe formulation systems company. ATS announced last night that it has entered into an agreement to purchase MARCO Limited, a provider operating in the food, nutraceuticals and cosmetics sectors with proprietary weighing hardware and process control software technologies (https://www.marco.co.uk/). Recall that ATS management has previously telegraphed potential acquisition and expansion into the food space, which is estimated to grow at mid-single digit CAGR. Akin to life sciences, food is also subject to industry and government regulations which heighten barriers to entry. The total consideration of the deal amounts to £25 mln (or $43 mln in CAD), implying an EV/EBITDA multiple of 9.6x (vs. ATA at 10.2x F2021E EBITDA; we include potential earn-outs in the calc.).

In fiscal year ending on March 31, 2020, MARCO is expected to generate revenues of £15 mln with an EBITDA margin percent in the low-to-mid 20s. ATS also expects to achieve 10% ROIC by the second FY following the acquisition (we are currently modeling 7.3% for the corresponding fiscal year for the consolidated entity). In addition, we highlight that MARCO is a product-based entity with its own proprietary technologies and currently derives only 10% of its annual revenues from after-sale services. Over time, ATS management sees the opportunity to leverage the combined platform and scale service offerings to clients in the food processing and packing industry. MARCO was founded in 1985 and currently the company has approximately 70 employees, mostly headquartered in Edenbridge, UK. Upon closing, MARCO will be headed by founder and CEO, Murray Hilborne.

Bottom line – nice tuck-in in a strategically important industry. One of the pushbacks we often hear in relation to ATS pertains to relatively low level of sales repeatability. To counteract this lack of visibility exposure to the right verticals is critical and over time the company has pulled itself into a less macro cyclical direction with healthcare being 53% of the top line (caveat being of course that pharma industry goes through its own cycles – be it generics, U.S. funding, etc.). We put the food industry in the same relatively stable bucket. While global PMIs have been in negative territory for the better part of 2019 (especially in Europe – a key market for ATS - 26% exposure to Germany, 18% to other Europe and 2% to Italy), the hope is that trade resolution between China and the U.S. and three interest rate cuts on the part of Fed will establish a floor. With that said, automation industry and ATS by extension remains capex-sensitive. We rate ATS shares Sector Perform, $22.00 price target (using a 10.0x EV/EBITDA multiple applied to F2021 forecasts). Shares are trading at 10.2x F2021E EV/EBITDA (vs. a broad group of predominantly OEM U.S. and international peers in 12.0x-14.0x range).