Aecon Group Inc.

Aecon Group Inc. (TSX: ARE) is a Canada based construction and infrastructure company which provides services to several private and public-sector clients. The Group operates through three major segments, including Infrastructure, Industrial, and Concessions.

Q1FY20 Financial Highlights: ARE reported revenue of CAD 747.5 million, as compared to CAD 650.3 million. The increase was driven by higher contribution from the construction segment, while lower-income from concessions segment remained a drag. Operating loss stood at CAD 9.7 million, as compared to CAD 10.8 million, supported by the increased revenue, partly offset by a surge in marketing, general and administrative expense, and higher depreciation expenses. Marketing general and administrative expenses increased due to higher personnel costs, project pursuit and bid costs coupled with a surge in the information technology costs. The Company reported a higher finance expense at CAD 5.4 million as compared to CAD 4.1 million in pcp due to an increase in interest expense from finance leases and a lower net cash position. Net loss widened to CAD 11.4 million, as compared to a loss of CAD 9.8 in Q1FY19. Gross margin and adjusted EBITDA margin improved to 8.2% and 2.6% respectively, against 7.2% and 1.8%, respectively. The Company exited the quarter with cash and cash equivalents of CAD 596.57 million, while total assets stood at CAD 3,145.44 million.

Q1FY20 Financial Highlights (Source: Company Reports)

Risk: The Company is witnessing a temporary jolt in operations due to the slowness or suspension of work on several projects in multiple jurisdictions due to directives issued by clients and governments in light of the COVID-19 pandemic. However, the work suspension can be extended depending on the Government’s directives to weather the current pandemic. Prolong halt might dampen the cash flow of the Company.

Valuation Methodology: P/E Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The Stock of ARE corrected ~14% so far this year. At the last traded price, the group’s shares were trading above the 75-days and 100-days simple moving average of CAD 14.25 and CAD 15.05, respectively, indicating a bullish- trend. The company has a committed credit facility of CAD 600 million, which would support the near-term working capital requirements. The group received new contract awards of CAD 912 million in the first quarter of 2020 compared to CAD 578 million in the same period in 2019. Further, The Company reported a higher backlog CAD 6,945 million, higher than CAD 6,749 million in the previous corresponding quarter, which would support the cash flow in the near term.  The Company expects that demand for its services is likely to remain strong following the COVID-19 pandemic as the federal government and provincial governments across Canada have identified investment in infrastructure as a key source of economic stimulus once the country reaches the recovery phase. The stock has witnessed a pullback rally and soared ~19% in the last one month. We have valued the stock using P/E based relative valuation method and have arrived at a target upside offering double-digit (in percentage terms). For the said purposes, we have used peers like Stantec Inc, Valmont Industries Inc, Toromont Industries Ltd etc. Hence, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 15.19 on June 17, 2020.

ARE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

SNC-Lavalin Group Inc.

SNC-Lavalin Group Inc. (TSX: SNC) is a fully integrated professional services and project management firm that offers a wide range of services, including financing, consulting, engineering and construction, procurement, and operations and maintenance. The firm serves clients in the resources, infrastructure, nuclear, and engineering design and project management industries. Recently, the company informed it had received the order of project management services for the Federal Way Link Extension project in the Seattle area with collaboration to Mott MacDonald. The project was valued at CAD 1.4 billion

Q1FY20 Financial Highlights: SNC declared its quarterly results, wherein the company reported total revenue at CAD 2,229.48 million, as compared to CAD 2,363.19 million in the previous corresponding quarter due to a lower income from Professional Services & Project Management (PS&PM) segment. The quarter reported a fall in the direct costs of activities to CAD 2,130.17 million from CAD 2,264.50 million in pcp and resulted in a higher total segment EBIT of CAD 99.31 million, as compared to CAD 98.69 million in pcp. Corporate selling, general and administrative expenses surged to CAD 36.78 million from CAD 6.24 million in Q1FY20 due to a higher reversal of some corporate incentives and revision of certain estimates in Q1FY20 coupled with a CAD 10.00 million negative adjustment to the provision for the Pyrrhotite Case litigation. Earnings before interest taxes and depreciation (EBIT) stood negative at CAD 43.27 million as compared to CAD 13.90 million in pcp due to a higher loss arising on financial assets at fair value through profit and loss. Net loss for the period widened to CAD 62.54 million, as compared to CAD 18.32 in the previous corresponding quarter. Cash and cash equivalents stood at CAD 2,102.32 million while total assets stood at CAD 13,016.38 million as on March 31, 2020.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Stock Recommendation: The Stock of SNC corrected ~25% so far this year, due to lower investor’s sentiments and a broader market correction due to COVID 19 pandemic. The group reported a dismal quarterly result where loses were widened drastically. Further, the group’s order backlog also declined in the first quarter. The Company caters to the oil and gas producing Companies and derives a decent portion of the revenue from the segment. Erosion of crude oil prices due to lower crude oil demand has resulted in a pile-up of inventory for Oil exploration companies. Those companies have halted their exploration and lowered the FY20 capital expansion budget. The above scenario is likely to put pressure on the group’s performance in the near term as the payment from these clients may get delayed. On the valuation front, the stock is trading at a forward price to earnings multiple of 18.2x, which is higher than the industry (construction engineering) median of 13.8x. Hence, considering the above factor, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 22.66 on June 17, 2020.

SNC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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