Sytchev Disses + Other Analysts' Roundup Inside the Market’s roundup of some of today’s key analyst actions
While investors gave a resoundingly positive response to Aecon Group Inc.’s (
) fourth-quarter 2023 earnings release on Wednesday, sending its shares soaring 11.8 per cent, National Bank Financial analyst Maxim Sytchev remains “on the sidelines,” seeing a better risk-adjusted reward elsewhere.
“We were reluctant to imagine a more positive skew, but the shares moved faster than we believe fundamentals or more precisely probabilities suggest,” he said in a research note. “We have three large projects (and 1 large arbitration) that need to be completed and while it’s perfectly possible that none of them present any negative surprises, we are not willing to underwrite that possibility at the moment. Increased accounting complexity also makes the tractability of clean / economic interest performance more convoluted. When stripping out lease payments (and divestitures), FCF generation amounted to $-19-million in 2023 (we feel zero attention is being ascribed to that).”
The Toronto-based company reported revenue of $1.13-billion, down 7 per cent year-over-year and below both Mr. Sytchev’s $1.215-billion estimate and the consensus projection of $1.215-billion as contributions from its Construction segment fell 10 per cent. However, consolidated adjusted EBITDA of $70.2-million topped expectations ($51.5-million and $62.9-million, respectively).
Moving forward, Mr. Sytchev said “all eyes [are] on a (potential) FCF inflection” and sees a priority on “de-risking the pro-forma business.”
“Fixed-price portfolio still a concern, but the company is making progress,” he said. “At $420-million, these projects are now less than 7 per cent of the company’s total backlog, with the majority attributed to Gordie Howe (CGL is expected to enter arbitration later this year). While any potential cost recoveries remain uncertain and further delays are certainly possible, the (slower-than-hoped-for) process of closing out these contracts is consistently moving in the right direction. Management estimates that pro-forma EBITDA margins excluding these problematic contracts stands at 9.6 per cent - implying over $370-million on an annual basis; while we do not think ARE will reach this level of underlying EBITDA in the near term, the figure serves as a benchmark of what a cleaned-up operation could deliver in the long term. Slogging through the remainder of legacy projects remains, however, a risk.
“Strategically, management sees Aecon’s business mix continuing to shift from traditional civil work to the more attractive electrical, nuclear and utilities markets (sustained double-digit growth in the latter segment is possible, despite some Q4/23 softness from utilities and telecoms). CapEx is expected to be roughly stable year-over-year, and management is open to tuck-in acquisitions to accelerate growth plans; in the Concessions space, smaller-scale airports have been identified as potential targets.”
Reducing his working capital “drags” and gross profit losses in 2024 due to a “slightly better” cash flow performance in the quarter, Mr. Sytchev hiked his target for Aecon shares to $15 from $10.50, reiterating a “sector perform” recommendation. The average target on the Street is $16.94.
“We anticipate flat growth in 2024 and slightly positive FCF but are still cautious about the company’s margin performance related to the remaining fixed-price projects, hence keeping it at the 4-per-cent range vs. 5-6 it was pre pandemic,” he said. “We also adjusted for the Oaktree PIK interest preferred shares to accrue at 12 per cent per annum adding to the outstanding balance, which is treated as Debt in our NAV.”
Other analysts making changes include:
* Desjardins Securities’ Benoit Poirier to $20 from $16 with a “buy” rating.
“We are pleased with the EBITDA beat (underscoring the improvement of the base business), stronger-than-expected cash inflow (net leverage of 0.0 times is a key milestone), dividend increase and sequential reduction in the problematic backlog,” he said. “We believe ARE now has the balance sheet in place to weather future legacy storms, and our new target price implies an attractive potential return for investors despite our conservative stance on future writedowns.”
“In our view, ARE’s current depressed valuation and the potential return represent a good entry point for longer-term investors with a slightly elevated risk appetite. We also note that ARE has been a takeout candidate in the past.”
* Stifel’s Ian Gillies to $16.50 from $13 with a “hold” rating.
“Aecon’s core business is performing well as evidenced by the 10.9-per-cent EBITDA margin generated in 4Q23,” said Mr. Gillies. “We still think project write-downs and arbitration settlements could provide negative surprises in future quarters, but the worst would seem to be behind the company. This view is further enhanced by an improved balance sheet with net debt forecast to be $215-million exiting 2024 (prior: $438-million).”
* RBC’s Sabahat Khan to $13 from $10 with a “sector perform” rating.
* Canaccord Genuity’s Yuri Lynk to $26 from $14 with a “buy” rating.
* CIBC’s Jacob Bout to $21 from $18 with an “outperformer” rating.
AECON GROUP INC
16.25+3.10 (23.57%