Aecon Group Inc.

Aecon Group Inc. (TSX: ARE) is a Canada-based company that operates in two major segments: Construction and Concessions. 

Key Highlights:

• Stable Dividend Payment: The group has a phenomenal record of consistent dividend payment over the years. Notably, in Q1FY21, the company has increased its dividend payment to CAD 9.635 million, higher than CAD 8.804 million in Q1FY20. Moreover, at the last closing price, the stock was offering a dividend yield of ~3.8%, which is decent considering the current interest rate scenario.
  

10-years dividend distribution 

• Balanced Portfolio: The company has a diversified revenue base, and its performance is not dependent on a particular segment, which indicates balanced risk management. This indicates a stable revenue generation amidst sluggish economic conditions. Moreover, ~64% of the total revenue is fixed in nature, which further supports revenue stability.                                          

Q1FY21 Revenue Bifurcation (Source: Company Presentation)

• Demand revival and positive outlook: With the economy coming back on track, the construction industry is on the verge of revival, and as per the Management, recurring revenue, bidding pipeline for new orders remained strong at the end of Q1FY21. The group expects demand for its services to remain elevated for the rest of FY21. Moreover, the company is also expected to commence several prestigious projects during the second quarter of FY21.
  

• Management Update: On June 08, 2021, the company announced the appointment of Scott Thon to the Board of Directors.

Q1FY21 Financial Highlights:

• ARE announces its quarterly result, wherein the company posted revenue of CAD 754.030 million, higher than CAD 747.515 million in the previous corresponding period (pcp). The slight growth was primarily due to improved revenue from the nuclear and utility segments, partially offset by a slide in income from civil operations, urban transportation and industrial segment.
• Gross profit stood at CAD 57.333 million, lower than CAD 61.216 million in pcp. The decline was primarily due to an increase in direct costs and expenses (CAD 696.697 million v/s CAD 686.299 million in pcp).
• The group reported a higher operating loss of CAD 10.223 million compared to a loss of CAD 9.651 million in Q1FY20. The period was marked by a slide in marketing costs, while a slightly higher depreciation and amortization costs acted as a drag.
• Net loss stood higher at CAD 18.411 million, from a net loss of CAD 11.414 million in Q1FY20, due to higher operating loss coupled with an increase in finance costs (CAD 10.775 million v/s CAD 5.941 million in pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: Due to the ongoing restrictions on account of the pandemic, the construction activities have suffered a lot, and the company reported a slide in the backlog due to lower order inflow. Continuation of the above trend would dampen the company’s performance.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The group reported a higher margin during Q1FY21, amidst the ongoing sluggish economic scenario and is encouraging. Gross profit margin and adjusted EBITDA margin stood at 7.7% and 3.0%, respectively, in Q1FY21, improved from 7.6% and 2.2% in Q1FY20. As per the 12-year Federal investment plan 2016 to 2028, the Government is likely to allocate ~CAD 180 billion for infrastructure projects and ~CAD 15 billion for the climate preservation projects like the clean energy segment. We believe the company is highly poised to extract the added opportunities coming from the sector. We have valued the stock using the P/E based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Stantec Inc, WSP Global Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 18.06 on June 24, 2021.

One-Year Technical Price Chart (as on June 24, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.