RE:NA Update Continuation of NBF thoughts:
Looking forward, with the new CFO having assumed “ownership” of cleaned up numbers, a likely revenue inflection in 2025E on the back of backlog visibility build and a small cap rotation that ARE missed (note that Russell 2000 trounced the S&P 500 in the last month due to expectations of lower rates – Figure 1), we believe we don’t need to see many catalysts to at least get us to our $20.50 price target that still implies 30%+ upside.
When layering on the nuclear thematic (19% of the topline), US transmission opportunity (Utilities represent 22% of sales; the likes of Quanta (NYSE: PWR; Not Rated) and MasTec (NYSE: MTZ; Not Rated) are now trading at about 16x and 10x EV/ 2025E EBITDA, respectively), still unaccounted for upside from new airport redevelopments (likely $2.00 - $3.00 / sh), collaborative contracts coming into the fold vs. fixed-price disaster (and clean balance sheet post several asset divestitures), the path of least resistance despite many false starts YTD is likely to the upside.
Incidentally, once AtkinsRalis quantified its LSTK exposure at $300 mln, shares lifted to the tune of over +50% through the subsequent 18 months (Figure 2). Context is somewhat different of course as investors thought that LSKT losses could start with a “B” (i.e. billions) whereas ARE’s new disclosure of max $125 mln in losses is still in addition to all the provisions we have endured over the last 15 months, we are nevertheless getting closer to an eventual end of contractual issues.
We are upgrading our rating on ARE shares to Outperform (from Sector Perform) and raising our price target to $20.50 (from $17.00) on higher 2025E projections; our target is derived using a 5.5x (4.5x prior) and 7.0x EV/EBITDA multiple for Construction and Concession segments, respectively plus a DCF-derived $2.33 / sh for ARE’s Bermuda airport stake.