RE:TD UpgradeMore details. GLTA
TD Cowen analyst Aaron MacNeil views North American Construction Group Ltd.’s underperformance following a fourth-quarter earnings miss “as an opportunity to buy a quality name at an attractive valuation.”
Accordingly, he raised his recommendation for its shares to “buy” from “hold” previously after comparing Alberta-based company to four Australian mining services peers given its recent $395-million acquisition of MacKellar Group.
“50 per cent of NACG’s revenues are derived from high carbon energy end markets, well above its Australian peers that are increasingly focused on ‘future-focused metals’ exposure,” said Mr. MacNeil. “In our view, the end market focus of this comparative group likely reduced local interest in the MacKellar Group prior to NACG’s acquisition and allowed NACG to acquire MacKellar at attractive valuation metrics. For investors in NACG who were already comfortable with its high oil sands exposure, this accretive transaction provided shareholders with a continuation of NACG’s industry-leading per share growth as well as increased size and scale.”
“We also compare NACG against our energy services coverage universe that does not feature NACG’s long-term contract structures and geographic/endmarket diversification and Aecon (ARE-T) that is engaged primarily in civil construction opportunities that features no commodity exposure, but needs to constantly secure new work as other projects roll off. Notably, NACG now trades at a modest discount to the Energy Services peer group and Aecon on a 2024estimated free-cash-flow yield basis.”
The analyst maintained his $34 target for its shares. The average is currently $44.
“For investors that hold a more conservative timeline for energy transition, NACG addresses what appears to be a decreasingly competitive wedge of the energy mix (high carbon energy sources including oil sands and coal) as competitors pivot to other end markets. In this context, we believe that NACG’s 2024E FCF Yield of 18 per cent (in line with expanded peer group average) is more than justified and that investors can expect enhanced project economics and a continuation of its strong historical growth profile despite the mature nature of its end markets,” said Mr. MacNeil.