Aecon Group Inc T.ARE

RE:NBF report

[Gabriel]

• Progressive design-build projects will de-risk the backlog. In addition to previously-disclosed collaborative projects set to enter the backlog in the next few quarters, Aecon has won additional bids under the same model framework. As a result, the imbedded margins in the backlog should be significantly higher than that of legacy operations and the adjusted EBITDA margins (ex. fixed price projects) of ~9% quoted by management represent a relatively realistic target going forward (of course, as we’ve seen unforeseen issues can quickly evaporate margins given the execution risks inherent in construction work). Management noted that the risk profile is an equally important consideration as expected margins when it comes to project selection. As pre-disposition top-line numbers fall out of comps and work ramps up on the aforementioned projects, we expect a moderate upward inflection in revenue growth next quarter and through 2025E.
• U.S. nuclear provides a wide opportunity set; further M&A is likely. In addition to good momentum on nuclear work in the Canadian market, management noted the 96 operating nuclear reactors in the U.S. also represent a significant opportunity for the bid pipeline. The recent acquisitions of Xtreme and United were noted to be accretive on an EBITDA and EPS basis, while further capital injection requirements for the businesses were manageable (minimal for United, more pronounced for Xtreme). Management is targeting a relatively conservative leverage profile for the consolidated business, though is willing to stretch the balance sheet further in the Utilities business. With the recent inflow of working capital, the balance sheet enables of further tuck-in acquisitions.