Aecon Group Inc. (TSX: ARE) is a Canada-based company that operates in two segments: Construction and Concessions. The Construction segment includes various aspects of the construction of public and private infrastructure projects, mainly in the transportation sector.

Key Highlights:

• Improved revenue across both the segments: For Q1FY22, the company reported an increase in the total revenue to CAD 985.91 million as compared to the total revenue of CAD 754.03 million in Q1FY21. The construction segment (which contributes 98.5%) witnessed an increase in sales to CAD 971.62 million in Q1FY22 vs CAD 744.10 million in Q1FY21. Higher revenue from the construction segment was primarily driven by the increased activity on the pipeline work in western Canada and growing field construction work at various mining and chemical facilities, etc. 

• Increased backlog: The company saw an increase in its backlog to CAD 6,423 million in Q1FY22 as compared to the backlogs of CAD 5,913 million in Q1FY21. In Q1FY22, ARE booked a total contract worth CAD 1,211 million, which is significantly higher than the contract of CAD 213 million booked in Q1FY21. Higher backlogs suggest that strong revenue numbers be recognized in the books in the coming quarters.

Source: Company presentation 

• Improved outlook and strong project pipeline: The management is having a strong outlook for FY22 considering the growing recurring revenue programs and strong demand for construction services across North America. The company is selected to complete the transformative Go rail expansion on-corridor works project (Billion dollar project) in Ontario and is already qualified to bid on a large number of projects for FY22. Below is the pictorial representation of the project pipeline the company is having in its portfolio.  

Source: Company presentation

Risks associated with investment

The company is vulnerable to the slowdown in economic activity, and rising interest rates could curb the capital expenditure plans. Any decline in the recurring revenues and backlogs could also impact the company’s revenue growth. 

Financial overview of Q1FY22 (Expressed in thousands of CAD)

Source: Company Filing 

• During Q1FY22, the company reported an increase in its total revenues to CAD 985.91 million as compared to CAD 754.03 million in Q1FY21. The construction segment reported an increase of 30.5% in its sales during Q1FY22 from Q1FY21, which helped the group to clock the higher revenue numbers.

• The company reported a marginal increase in gross profit of CAD 61.09 million in Q1FY22 against the gross profit of CAD 57.33 million in Q1FY21. On account of higher direct costs and expenses which stood at CAD 924.82 million in Q1FY22 vs CAD 696.69 million in Q1FY21, the group posted a slight increase in the gross profits.

• For Q1FY22, the company narrowed its losses to CAD 17.44 million against the net loss of CAD 18.41 million in Q1FY21.
  

Valuation Methodology (Illustrative): EV to EBITDA based

Analysis by Kalkine Group

Stock Recommendation:

The group reported an increase in the total revenue of CAD 985.91 million in Q1FY22 as compared to CAD 754.03 million in Q1FY21, also the increase in the backlogs to CAD 6,423 million in the same period (Q1FY22) against the backlog of CAD 5,913 million in Q1FY21, shows the strong numbers to be reported in the coming quarters. The group is optimistic about the rising demand for various construction projects across North America which will be a key positive and the group is qualified to bid on those projects and maintain a strong portfolio of projects for the coming years. On the valuation front, the stock is measured on the EV/EBITDA based multiple and it is currently trading at 4.4x as compared to the industry (industrials) mean of 7.1x, suggesting the stock is still undervalued, and we have considered Great Lakes Dredge & Dock Corp., Sterling Construction Company Inc., etc as the peer group for the comparison.

Therefore, based on the above rationale, and valuation, we recommend a “Speculative Buy” rating on the stock of ARE at the last closing price of CAD 14.51 on May 19, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of May 19, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV

Technical Analysis Summary

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.