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 quarterly results wherein the company reported revenue of CAD 779.4 million, lower than CAD 867.3 million reported in the previous corresponding period (pcp). The slide in top-line is due to a decline in the construction segment on account of lower revenue from nuclear operations, lower civil operations and urban transportation system. Adjusted EBITDA was reported at CAD 24.4 million, significantly lower than CAD 57.3 million reported a year ago. Adjusted EBITDA margin contracted 350 basis points to 3.1% due to a decline in the gross profit margin in civil operations and urban transportation systems and lower volume in nuclear operations. The company reported a decline in the marketing, general and administrative expense primarily driven by a decline in the personnel, consulting, travel, and other discretionary expense. The company posted an operating loss of CAD 0.8 million, as 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 in the previous corresponding period.

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 Earnings Based (Illustrative)

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

Stock Recommendation: The stock corrected ~21% so far this year, due to weak investors' sentiment on account of demand destruction scenario across the construction segment. Despite a challenging operating environment, the company received new contracts amounting to CAD 1,080 million, higher than CAD 873 million in pcp, which is encouraging. The company purchased specific telecommunications assets from Powerland, a Winnipeg-based IT solutions provider during the quarter. The above acquisition would build the company's position as a leading provider of end-to-end telecommunications infrastructure services across Canada, with significant scope to expand. The group reported a backlog of CAD 7,255 million, higher than CAD 6,755 million in pcp, which is impressive as it indicates an increase in future construction activities. With the revival of the economy, we expect an improvement in the order book, which would ultimately drive business growth. Further, at the last traded price, the stock was offering a decent dividend yield of ~4.6%, which is lucrative considering the current interest rate environment. We have valued the stock using Price to Earnings based relative valuation method and have arrived at a lower double-digit upside (in percentage terms). For the said purposes, we have considered peers like AutoCanada Inc, SNC-Lavalin Group Inc etc. Considering the aforesaid facts, we recommend a 'Buy' rating on the stock at the closing market price of CAD 13.81 on September 22, 2020.

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

Morneau Shepell

Morneau Shepell (TSX: MSI) is a human resources company that provides consulting and administrative services in four segments: well-being, administrative outsourcing, consulting, and absence management. The well-being segment, which produces the majority of income, offers educational and counselling services aimed at supporting employee and family needs. The company generates most of its revenue in the United States and Canada.

The company declared a monthly dividend of CAD 0.065 per share, payable on October 15, 2020.

Q2FY20 Financial Highlights: MSI declared its second-quarterly results, wherein the company reported revenue of CAD 246.175 million, improved from CAD 212.666 million reported in the previous corresponding period (pcp). The growth was aided by the positive impact from the acquisition of Mercer in 2019 coupled with the improved performance from health and defined benefit pension plan administration business across the United States. This was partially offset by the divestiture of the company's benefits consulting business. Adjusted EBITDA stood at CAD 52.075 million, as compared to CAD 45.882 million in pcp. The company reported its adjusted EBITDA margin at 21.2%, marginally lower than 21.6% in pcp. Profit for the period stood at CAD 8.258 million, as compared to CAD 6.329 million in Q2FY19. Normalized Free Cash Flow, stood at CAD 30.844 million, against CAD 27.618 million in pcp, aided by improved cash provided by operating activities.

Q2FY20 Financial Snapshot (Source: Company Reports)

Risk: The company’s profitability and growth are highly dependent on information systems and technology, goodwill, business from key clients, reliance on key professionals and economic conditions. Change in any above factors might hinder the company’s performance.

Valuation Methodology: EV to Sales Based (Illustrative)

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

Stock Recommendation: The stock of MSI has corrected ~17% so far this year. The company is a provider of technology-enabled HR services that deliver an integrated approach to employee wellbeing through its cloud-based platform. The company is using cloud technology, and the prospect is enormous, looking at the acceptability of the technology among the organizations. The business is more or less resilient in nature and is expected to retain its top-line in the coming days. The company has a solid product line, and the management is confident of meeting the changing customer-requirements in the coming days, which is a key positive. Furthermore, the current quarter was marked by the highest annual client satisfaction and employee engagement activities, which is encouraging. Furthermore, the company has sold its Consulting business in order to improve its overall financial flexibility. The management stated that all operations and systems are performing at pre-pandemic levels. We have valued the stock using EV to Sales based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered the industry average (Professional & Commercial Services) on the next twelve months (NTM). Hence, we recommend a ‘Buy’ rating on the stock at the closing market price of CAD 28.04 on September 22, 2020.

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

Disclaimer

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