Aecon Group Inc.

Strong Liquidity to Sail Through Crisis: Aecon Group Inc. (TSX: ARE) is Canada’s leading construction and infrastructure company. Aecon operates through three major segments, including Infrastructure, Industrial, and Concessions. The company is set to announce its first quarter FY20 results after the markets close on April 23, 2020.

Recently, ARE announced that it is withdrawing its 2020 outlook given the uncertainty surrounding the current crisis. The company reported temporary suspension of work across several projects. Despite near-term hiccups, ARE remains well capitalized to easily sail through the current crisis. The company had CAD 74 million of cash as on March 30, coupled with a revolving credit facility of CAD 600 million, of which $105 million was utilized. Notably, ARE has no debt or working capital credit facility maturities until the later part of 2023, except equipment finance leases.

The company paid a quarterly dividend of CAD 0.16 per share, depicting a 10% growth on y-o-y basis. The company reported a 14% CAGR growth in dividend for the last nine years.

FY19 Financial Highlights: For the period ended December 31, 2019, ARE posted revenue of CAD 3,460.4 million, up 6% on y-o-y basis, driven by higher revenue in civil operations, urban transportation systems and nuclear operations. Like-for-like sales jumped 13%. Adjusted EBITDA stood at CAD 221.9 million with improvement in margin, as compared to adjusted EBITDA of CAD 207 million in FY18. Operating margin stood at 3.1%, improved from 2.7% in FY18. The improvement was due to the higher revenues. The company reported a net profit of CAD 72.9 million, improved substantially from CAD 59 million, cushioned by higher operating profits and lower finance expense, which was offset by higher income tax expense.

FY19 Income Statement Highlights (Source: Company Reports) 

Valuation Methodology: P/E Multiple Approach 

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

Stock Recommendation: The stock of ARE is quoting at CAD 13.63 with a market capitalization of ~CAD 820.51 million. The stock corrected by ~16.33% and ~23.42% in the last one month and three months, respectively, reflecting the negative impact of the COVID-19 outbreak. We believe that company has enough liquidity to sail through the current crisis and likely to perform well once the economy picks up pace. However, in the near-term, the stock could remain range bound as the infrastructure and construction activities are directly correlated with the health of an economy. We have valued the stock using the price to earnings (P/E) based relative valuation method. We have taken peers like WSP Global Inc (TSX: WSP), SNC-Lavalin Group Inc (TSX:  SNC), Stantec Inc (TSX: STN) etc. and arrived at a target price of lower double-digit upside potential (in % terms). Hence, we recommend a buy rating on the stock at the closing market price of CAD 16.63 as on April 9, 2020.

ARE Daily Price Chart (Source: Thomson Reuters)

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