Aecon Group Inc (TSX: ARE) is a Canada-based company that operates through two major segments, namely Construction and Concessions. The Construction segment includes various aspects of the construction of public and private infrastructure projects, primarily within the transportation sector while the concessions segment provided development, financing, construction, and operation of infrastructure projects.

Key Updates:

• Growth in Backlog: At the end of Q1FY22, the company reported CAD 6,423 million, which is higher that CAD 5,913 million in pcp. Notably, during the quarter, new contract awards of CAD 1,211 million were booked, which is significantly higher than CAD 213 million in pcp. An increase in order backlog denotes a possible uptick in the future revenues.

 Source: Company Report

• Positive Macros: For FY22, the group expects continuation of the strong demand dynamics across the construction services across North America. Additionally, the demand for its services will remain healthy for the foreseeable future supported by government for the infrastructure revival. Recently, the group received a prestigious order to deliver the transformative GO Rail Expansion On-Corridor Works project in Ontario, wherein the company would design, build, operate and maintain contract model. Meanwhile, ARE is also pre-qualified on several large project bids due to be awarded during 2022 and has a robust pipeline of opportunities to further add to backlog over time.
  

• Increase in dividend payment amidst turbulence times: In Q1FY22, the company paid its total distribution of CAD 10.6 million, as compared to CAD 9.6 million in pcp. This is impressive as most of the companies, are lowering their payment in order to retain liquidity. The stock of ARE carries a dividend yield of 5.017% on an annualized basis, which looks impressive considering the ongoing interest rate scenario.

Risk associated with the investment:

The company’s operations might be hindered due to the sluggish economic scenario and a decline in the construction activities. This might result in lower backlog and a decline in income and cash flows.

Q1FY22 Financial Highlights:

• ARE announced Q1FY22 results, wherein the company reported revenue of CAD 985.9 million v/s CAD 754.0 million in Q1FY21. Revenue was higher in the Construction segment driven by strong performance from the industrial, civil, nuclear and utilities segments.
• The period was marked by a higher Marketing, general & administrative expense, along with a surge in company’s direct costs & expenses. Meanwhile, the company’s operating loss shrank to CAD 9.6 million in Q1FY22, as compared to CAD 10.2 million in pcp, supported by a higher income as mentioned above.
• The company posted an increase in finance cost, due to an increase in interest on short-term debt. The group posted net loss of CAD 17.4 million, as compared to CAD 18.4 million in pcp, due to a higher income tax recovery during the period.

Valuation Methodology (Illustrative): EV to EBITDA based methodology.

Analysis by Kalkine Group

Stock Recommendation:

The Company expects that demand for its services is likely to remain healthy for the foreseeable future as the federal government and provincial governments across Canada have identified investment in infrastructure as a key source of economic stimulus. The company expects its recurring revenue to grow driven by demand in the utilities sector, particularly in telecom and power-related work. Moreover, the Concessions segment is expected to see improved airport traffic from Bermuda, as the region is likely to recover from COVID-19 pandemic.

We have valued the stock using the EV to EBITDA based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Tutor Perini Corp, Bird Construction Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of ARE at the last closing price of CAD 14.75 on May 02, 2022.

One-Year Technical Price Chart (as on May 02, 2022). Analysis by Kalkine Group

Note: The reference data in this report has been partly sourced from REFINITIV

  Technical Analysis Summary

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