Raymond James analyst Frederic Bastien and Bryan Fast see their Infrastructure & Construction (I&C) coverage universe “entering a possible recession (or soft landing) in generally good shape.”
That optimism comes after an “underwhelming” performance in 2022, which saw 12 of the 18 stocks they cover, which also includes select property services providers, “faring much worse than the TSX.”
“The year was a tale of two halves,” they said. “1H22 saw valuation concerns cause multiple compression across sectors, and inflation hit labour intensive businesses (DXT, FSV) particularly hard. Engineering consultancies (STN, WSP) also suffered early in the year, but then firmed up when it became clear the growing demand for essential manufacturing, reliable energy and resilient value chains will keep them busy well into the future. 2H22 performance was more positive, as most firms under coverage generate very little business from the I&C segments most vulnerable to elevated interest rates, including residential and commercial. What the rapid pace of rate increases did, however, is drag the price discovery battles between buyers and sellers of commercial real estate, and lure yield-seeking investors away from real assets. This explains why BEP, BIP and CIGI were big outliers during the period. Another one was ARE, which cautioned that four legacy fixed-price projects were at risk of incurring additional costs.”
For 2023, the analysts think the group has “diversified their revenue streams by discipline, end-market and geography, and many can count on stronger balance sheets to see them through tougher times. Moreover, weaker links are no longer part of the equation due to takeovers, bankruptcies or research coverage realignment, which partly justifies the positive bias behind our stock recommendations.”
“We offer high-conviction ideas for each of the I&C sub-groups: FSV, STN, FTT, BDT and BDI,” they said. “FirstService is entering the year fresh off acquisitions and with structural advantages in the highly-fragmented market for restoration and mitigation work, while Stantec is riding strong tailwinds and yet trades at a reasonable valuation. Finning is coming off an impressive year and should maintain momentum supported by key end markets. On the small-cap side, we selected Bird Construction because of its strong financial position, record backlog, and improved risk profile. Last, Black Diamond Group, a radically transformed small-cap stock is deploying rental assets into receptive end-markets, and capitalizing on inflation.”
The analyst's revised targets include:
- WSP Global Inc. ( “outperform”) to $205 from $190. Average: $181.36.
- Brookfield Renewable Partners LP ( “outperform”) to US$37 from US$42. Average: US$38.82.
- Brookfield Infrastructure Partners LP (“outperform”) to US$45 from US$47. Average: US$42.97.