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 declared its quarterly results wherein revenue stood at CAD 779.4 million, as compared to CAD 867.3 million. The decline was majorly due to slowdown of projects across the nuclear operations and civil operations and urban transportation systems, partially offset by an improved performance from utilities and industrial segments. Due to the suspension of the commercial operations at the Bermuda International Airport, the group reported a dip in the overall performance. Adjusted EBITDA stood at CAD 24.4 million against CAD 57.3 million, a year ago. The Company witnessed an Adjusted EBITDA margin contraction of 350 basis points 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 quarter was marked by a lower marketing, general and administrative expense primarily driven by a decline in the personnel, consulting, travel, and other discretionary expense. Aecon reported 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: P/CF Based (Illustrative)

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

Stock Recommendation: The stock corrected ~15% so far this year. 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 reported backlog at the end of the quarter stood at CAD 7,255 million, higher than the previous corresponding period of CAD 6,755 million. A Higher backlog is an indication of improved revenue for future revenue. 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. The stock carries an impressive dividend yield of 4.29%, which would attract several income investors. We have valued the stock using Price to CF value-based relative valuation method and have arrived at a target upside of lower 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 14.93 on August 24, 2020.

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

Bird Construction Inc.

Bird Construction Inc. (TSX: BDT) operates as a general contractor, with a decent presence across the Canadian market. The company focuses primarily on projects related to industrial, commercial and institutional sectors of the general contracting industry.

Recently, the company announced that it had entered into a definitive agreement to acquire Stuart Olson Inc. at a price consideration of CAD 96.5 million. The Management informed that the above acquisition would help the company to diversify its businesses across new geographies.

Q2FY20 Financial Highlights: BDT announced its quarterly results, wherein the company posted construction revenue of CAD 282.766 million as compared to CAD 315.428 million in the previous corresponding period (pcp). The performance of the company was impacted by the COVID-19 pandemic, and the business witnessed major headwinds from temporary project shutdowns and reduced productivity on project sites in the month of April and early May 2020. Gross profit improved significantly year-over-year driven by growth in the industrial work program. The improved performance was further aided by a higher margin from industrial work program. Adjusted EBITDA stood at CAD 12.328 million as compared to CAD 5.447 million in pcp. Adjusted EBITDA margin improved 263 basis points at 4.36%. The company posted a net income of CAD 5.624 million as compared to CAD 1.001 million. The quarter was marked by the inclusion of ~CAD 1.3 million of pre-tax acquisition costs related to the due diligence and agreement to acquire Stuart Olson Inc.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks:  The Construction activities are related to the current economic health and a major halt in the activities on account of the second wave of COVID 19 might act as a hurdle to the constriction projects.

Stock Recommendation: The stock of BDT stood resilient in the recent past and appreciated ~27% in the last one year and outperformed the benchmark by ~23%. BDT reported a backlog of CAD 1.6 billion, reflecting an increase of 19.3%. The Company is expecting a cost synergy of CAD 25 million by the end of 2021, which would support the margin. Despite a major jolt in the economy, the Business reported better than expected numbers, which is impressive and the recent acquisition of Stuart Olson Inc. would expand the Company’s footprints and business synergies and would lead to an improved business prospect. We believe the recent acquisition would help the Company to increased breadth and scale, diversified across services through combined workforces and with the implementation of the technology platform and comprehensive service solution, augurs well for improved client base. With the gradual reopening of the overall economy, we expect a surge in construction activities which would further aid the Company for improved performance. The management believes that near-record Backlog and Pending Backlog would provide ample work at good margins to help the Company to be considerably more profitable in 2020 than recent years despite a projected decline in revenue year-over-year. At the last traded price, the stock was offering a dividend yield of 5.73%, which is lucrative considering the current interest rate environment. BDT stock is available at a significantly lower valuation as compared to the industry median. BDT stock is available at an EV to Sales of 0.1x on NTM basis, as compared to 0.6x of industry (Construction & Engineering) median. Hence, we recommend a ‘Speculative Buy’ on the stock at the current market price of CAD 6.82 on August 24, 2020.

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

Disclaimer

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