Aecon Group Inc.
Good underlying performance
Our view: Aecon Group Inc. ("Aecon") reported Q3 Adjusted EBITDA that was ahead of RBC/consensus forecasts, with the quarter reflecting no noise from legacy fixed price projects (vs. $277MM of losses over the TTM period and a $91MM loss in Q3/23). We raise our price target +$8 to reflect the improvement in the underlying business and reiterate our Sector Perform rating.
Key points:
Thoughts exiting Q3 – Q3 Adjusted EBITDA was ahead of RBC/consensus forecasts, with the quarter seeing no negative impact from the company's legacy fixed price projects. For perspective, Aecon realized a $91MM loss from these projects in Q3/23 and $277MM of losses over the TTM period (recall that in Q2/24, the company reached a settlement agreement on the CGL dispute, resulting in a $127MM accounting charge, and had updated its views on the remaining 3 fixed-price legacy projects, resulting in an additional $110MM charge). While management noted today that it expects substantial completion of the Eglinton and Finch LRTs in Q1/25, we note that go-forward results will still likely reflect some underlying assumptions for cost/arbitration recoveries associated with these projects, which could be reversed in the event of outcomes that are less favorable than currently anticipated (i.e., similar to CGL noted above). Further, Gordie Howe is still expected to be completed by Sep. 2025, and Aecon has previously outlined that its expects the potential for future cash losses through to completion of the remaining legacy projects to not exceed $125MM (vs. backlog of $182MM exiting Q3 for the legacy projects; for perspective, Aecon had $197MM in cash + equivalents exiting Q3, excluding balances held by joint operations).
Q3 Adjusted EBITDA above consensus; underlying Construction segment reported Adjusted EBITDA margin of 10.6% – Q3 revenue of $1,275MM (+2.9% YoY, which included $77MM of revenue from the fixed price legacy projects) was largely in line with RBC/consensus of $1,240MM/ $1,262MM, while Adjusted EBITDA of $127MM was above RBC/consensus forecasts of $114MM/$116MM. Excluding the legacy project revenue, Aecon's underlying Adjusted EBITDA margin on its Construction business was 9.5% in Q3/24 and 7.9% on a LTM basis (vs. 10.4% in Q3/23 and 8.6% LTM as of Q3/23) and its consolidated Adjusted EBITDA margin was 10.6% in Q3/24 (which in part reflects equity-accounted contribution from the Concessions segment; vs. 11.2% in Q3/23). Looking ahead, backlog exiting Q3 stood at $5,980MM (-3.6% YoY; -3.3% QoQ), with new contract awards in the quarter totaling $1,069MM (+80.9% YoY). See inside for additional details.
Consolidated revenue largely in line with RBC and consensus forecasts
Q3 revenue of $1,275 million (+2.9% YoY,) was largely in line with RBC/consensus forecasts of $1,240/$1,262 million. By segment, Construction revenue ($1,273 million vs. RBC forecast of $1,240 million) was modestly above our expectations, while Concessions revenue ($2.6 million vs. RBC forecast of $3.0 million) was modestly below.
Adjusted EBITDA ahead of consensus forecast
Aecon reported Adjusted EBITDA of $126.9 million vs. consensus forecast of $116.2 million. Excluding the losses on the legacy projects, Aecon's underlying Adjusted EBITDA margin on its Construction business was 9.5% in Q3/24 and 7.9% on a LTM basis (vs. 10.4% in Q3/23 and 8.6% on a LTM basis as of Q3/23) and its consolidated Adjusted EBITDA margin was 10.6% in Q3/24 (which in part reflects equity-accounted contribution from the Concessions segment; vs. 11.2% in Q3/23).