Major Contract wins: Aecon Group Inc. (TSX: ARE) is Canada’s leading construction and infrastructure company and provides services to several private and public-sector clients. The Group operates through three major segments, including Infrastructure, Industrial, and Concessions.

The Company reported a contract addition of CAD 912 million during the first quarter of FY20, as compared to CAD 578 million in the previous comparable period. ARE confirms its acquisition of Voltage Power Ltd., an electrical transmission and substation contractor at a price consideration of CAD 30 million. The acquisition will add a high-voltage power transmission and distribution facility for the company.

Q1FY20 Financial Highlights: ARE declared its quarterly results, wherein the Company reported revenue of CAD 747.5 million, as compared to CAD 650.3 million. The increase was driven by higher contribution from civil construction segment, while lower income from Concessions segment remained a drag. Operating loss stood at CAD 9.7 million, improved from a loss of CAD 10.8 million, thanks to the higher income, partly offset by an increase in marketing, general and administrative expense, and higher depreciation costs. The Group reported a loss of CAD 11.4 million, stood higher from CAD 9.8 in the previous corresponding period. On the margin front, ARE reported a decent improvement with gross margin and adjusted EBITDA margin at 8.2% and 2.6% respectively, as compared to 7.2% and 1.8%, respectively in Q1FY19.

1QFY20 Income Statement Highlights (Source Company Reports)

Valuation Methodology (Illustrative): Price/Cash Flow based approach

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock climbed ~9% in the past one month and currently trading above its 20 days simple moving average of CAD 13.18 along with a market capitalization of CAD 813.49 million. On account of the COVID 19 crisis, the company expects a lag in operations and distribution segment followed by a temporary delay in contract addition. The company further reaffirmed zero cancellation of backlog contracts, which is impressive owing to the current scenario. Demand for the services is expected to remain strong due to ongoing support from government bodies. ARE seems to have sufficient liquidity and strong balance sheet to pass through the current crisis without much impact. To add to this, the Company has no debt or working capital credit facility maturities till H2FY23. We have used peers like WSP Global Inc (TSX: WSP), SNC-Lavalin Group Inc (TSX: SNC), Stantec Inc (TSX: STN) and arrived at a target price offering lower double-digit upside, by using P/CF-based relative valuation metrics. Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 13.56 as on April 23, 2020.

ARE Daily Price Chart (Source: Thomson Reuters)

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