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:

• Growing recurring revenue: In FY21, the company reported its recurring revenue of CAD 679 million, which is the highest in the last three years. The growth was driven by strong performance from the construction segment. A higher recurring indicates increase in repetitive business and revenue stability. For FY22, the company expects its recurring revenue is likely to grow, driven by strong demand from the utilities sector. Moreover, the Concessions segment is expected to see airport traffic in Bermuda aided by the gradual revival from the impact of COVID 19 pandemic, which is likely to support the recurring revenue as well.

                                                Source: Company Report

• First Negotiations Proponent for GO Rail Expansion: Recently, the company received a First Negotiations Proponent from Infrastructure Ontario (IO) and Metrolinx to design, build, operate and maintain the GO Rail Expansion - On-Corridor Works project in the Greater Toronto Area. Upon successful conclusion of First Negotiations Proponent, ARE would proceed towards Commercial Close, which is expected in the coming months. Early works and a two-year collaborative development phase are expected to commence in Q2FY22, with operations and maintenance anticipated to commence from Q2FY24.

• Attractive dividend yield: The stock of CNE carries an annualized dividend yield of ~4.348%, which looks attractive considering the ongoing interest rate scenario. Moreover, the group distributed a higher dividend of CAD 41.2 million in FY21, as compared to CAD 37.5 million in FY20. This is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity.

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. 

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• ARE announced its full-year result, wherein the company its revenue of CAD 3,977.3 million v/s CAD 3,643.6 million in FY20. The surge was driven by higher revenue from the nuclear and utilities segments.
• The period was marked by higher direct costs and expense, which resulted to a lower gross profit of CAD 366.8 million, compared to CAD 401.2 million in FY20.
• Marketing, general and administrative expense and depreciation and amortization stood marginally lower than the previous year, other income slide from FY20. This was partially offset by slightly higher income from projects accounted for using the equity method. Hence, operating profit stood lower at CAD 118.8 million v/s CAD 149.8 million in FY20, due to the above-mentioned reasons.
• Profit for the year declined to CAD 49.6 million in FY21 from CAD 88.0 million in FY20. This was primarily due to lower operating profit coupled with higher finance costs, partially offset by a lower income tax expense.

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

Analysis by Kalkine Group

Stock Recommendation:

The Company expects that demand for its services are 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. Notably, the company is pre-qualified on several large project bids, and are expected to be confirmed during 2022. Moreover, the group has a robust pipeline of opportunities to further add to backlog in coming days, which is a key positive.

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 Russel Metals Inc, Granite Construction Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of ARE at the last closing price of CAD 17.02 on April 01, 2022.

One-Year Technical Price Chart (as on April 01, 2022). Analysis by Kalkine Group

Technical Analysis Summary:

Disclaimer

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