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. 

Q1FY20 Financial Highlights: Aecon Group Inc. announced its quarterly results and reported revenue of CAD 747.5 million, significantly higher than CAD 650.3 million in the previous corresponding period (pcp), aided by improved performance from the construction segment, while lower-income from concessions segment remained a drag. Operating loss stood at CAD 9.7 million, declined from CAD 10.8 million in Q1FY19, supported by the higher revenue, partly offset by an increase in marketing, general and administrative expense, and higher depreciation expenses. The increase in operating cost was primarily attributable to higher personnel costs, project pursuit and bid costs coupled with a surge in the information technology costs. ARE posted an increase in the finance expense of CAD 5.4 million against CAD 4.1 million, a year ago due to an increase in interest expense from finance leases. Net loss widened to CAD 11.4 million, from CAD 9.8 million in Q1FY19. The Company ended the quarter with cash and cash equivalents of CAD 596.57 million, while total assets stood at CAD 3,145.44 million.

Q1FY20 Financial Highlights (Source: Company Reports) 

Risk: 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: EV/EBITDA Based Relative Valuation (Illustrative)

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

Stock Recommendation: The stock of ARE corrected ~17% so far this year. Despite a tepid macro scenario and soft industrial demand, the company’s backlog remained strong, which is a key positive. The company reported improved performance from its Construction segment, civil operations and urban transportation systems, which is impressive. Due to ongoing pandemic, the Group faced a delay of certain projects, which is short-term in nature, and we expect demand to improve as economic activities return on track. The company expects that demand for its services is likely to remain strong following the COVID-19 pandemic 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. Further, the Group had ample liquidity (~CAD 600 million), which seems sufficient to support its near-term working capital. Furthermore, the stock carries a dividend yield of ~4.4%, which is attractive, considering the current interest rate scenario. We have valued the stock using EV/EBITDA based relative valuation approach and considered industry (Construction and Engineering) median on NTM basis and arrived at a target price offering double-digit upside potential (in % terms). Hence, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 14.61 as on July 7, 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.

Key Highlights:

• Recently, the company sold Bird Capital Limited's 20% interest in the P3 concessions responsible for 18 schools and nine childcare facilities in Saskatchewan to Concert Infrastructure.
• The company would announce its second-quarter FY20 results on August 11, 2020.
• The company has declared a quarterly dividend of CAD 0.0325 per share, payable on July 20, 2020.

Q1FY20 Financial Highlights:  Bird Construction Inc. announced its quarterly results, wherein the company posted revenue of CAD 321.64 million as compared to CAD 261.77 million in the previous corresponding period. The company's improved performance was underpinned by growth in the industrial work program, while the commercial and institutional work program remained flat during the quarter. Gross profit stood at CAD 16.92 million, significantly higher than CAD 6.32 million in pcp, due to an increase in revenue. Income from operations stood at CAD 3.86 million, as compared to a loss of CAD 7.98 million in Q1FY19, driven by a lower general and administrative expenses and a higher income from equity-accounted investments. Adjusted EBITDA stood higher CAD 7.562 million, as compared to a loss of CAD 3.132 million in Q1FY20. The company reported an improved Adjusted EBITDA margin of 2.35%, as compared to a negative 1.2% in pcp. Net income, during the first quarter, stood higher at CAD 1.12 million, as compared to a loss of CAD 6.46 million in pcp, driven by a higher finance income and operating income. The Group ended the quarter with a Cash balance of CAD 140.40 million while total asset stood at CAD 821.60 million.

Q1FY20 Income Statement Highlights (Source: Company Reports)

 Risks: A prolonged lockdown or any further extension in containment measures would result in a delay in project execution, thereby hampering the group’s performance.

Stock Recommendation:  The stock of BDT stood resilient in the recent past and appreciated ~8% in the last one year and outperformed the benchmark by ~15%. The company has a substantial backlog of CAD 1.4 billion, which increased 11% on an annual basis. 66% of these backlogs are expected to execute in the next 12 months, which provides stable revenue visibility. The company has diversified its exposure to the LNG, nuclear, public transit, modular and environmental sectors with lower risk contract and expects industrial projects to drive the growth going forward. Investors should note that the stock of BDT is trading above the 200-days simple moving average of CAD 6.01, indicating a bullish trend. At the last closing price, the stock is offering a dividend yield of ~6.34%, which is lucrative. The stock soared ~38% in the last three months. The BDT stock is trading at a very attractive valuation as compared to the Industry Median. The stock is available at an EV/Sales of 0.1x on NTM basis, as compared to the industry (construction & engineering) average of 0.7x. A slowdown in construction in construction activities poses a key risk for the group. If the slowdown in construction activities persist for a prolonged time, it might hamper the company's performance. However, we expect construction activities to pick up following the easing in lockdown restrictions. Hence, we recommend a 'Speculative Buy' on the stock at the closing market price of CAD 6.15 on July 7, 2020.

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

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