Aecon Group Inc.

Aecon Group Inc. (TSX: ARE) is a Canada-based company that operates in two major segments, namely Construction and Concessions. The Company provides integrated solutions to both private and public-sector clients and provides services like project development, financing, investment and management services through its Concessions segment. 

Q2FY20 Financial Highlights: ARE announced its second quarter results, wherein the Company witnessed a negative impact from the recent pandemic. Furthermore, due to the suspension of the commercial operations at the Bermuda International Airport, the performance stood below the normal level. Revenue came in at CAD 779.4 million, reflecting a downfall of ~10% on y-o-y basis. The decline was primarily attributed by projects slowdown across the nuclear operations and civil operations and urban transportation systems, partially offset by higher revenue in utilities and industrial operations. Adjusted EBITDA stood at CAD 24.4 million during the quarter as compared to CAD 57.3 million, a year ago. Adjusted EBITDA margin contracted 350 basis points on y-o-y basis to 3.1% due to lower volume and gross profit margin in civil operations and urban transportation systems and lower volume in nuclear operations. The Company made an operating loss of CAD 0.8 million compared to an operating profit of CAD 28.1 million in the previous corresponding period (pcp). Net loss, during the quarter stood at CAD 6.2 million as compared to a net profit of CAD 20.4 million, a year ago.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: There was a slowness or suspension of work on several projects in multiple jurisdictions due to directives issued by the governments in light of the COVID-19 pandemic. Any extension in the containment measures by the government would result in further delay of projects. In such a scenario, the company is likely to face pressure on its financials.

Valuation Methodology: Price to CF Based (Illustrative)

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

Stock Recommendation: The stock of ARE corrected ~16% so far this year amid the volatility in the equity market. The company’s performance was impacted by COVID-19 pandemic during 2QFY20. Despite a tepid macro scenario and soft industrial demand, the company’s backlog remained strong as the group reported an improved backlog of CAD 7,255 million, as compared to CAD 6,755 million at Q2FY19. A higher backlog provides greater visibility to revenue, which is a key positive. Further, the company reported new contract awards of CAD 1,080 million as compared to CAD 873 million, a year ago. During the last quarter, the company acquired assets from Powerland, a Winnipeg-based IT solutions provider. We believe the above acquisition would enhance the company’s footprint across the end-to-end telecommunications infrastructure services in Canada. The acquisition is likely to benefit the group as there are significant growth opportunities and investments underway and forecasted in this sector. The company expects that demand for its services is likely to remain strong, 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. We have valued the stock using Price to CF value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like WSP Global Inc, Toromont Industries Ltd and Stantec Inc etc. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 14.68 on July 24, 2020.

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

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