Inside the Market’s roundup of some of today’s key analyst actions
After meetings last week with its senior management team, ATB Capital Markets analyst Chris Murray sees Aecon Group Inc. (
) as a “multiple expansion and growth story.”
“The discussion touched on several aspects surrounding the Company’s outlook, including the demand environment, legacy projects, concessions, opportunities for Aecon Utilities, capital recycling opportunities, and capital allocation priorities following the completion of three strategic transactions in 2023,” he said. “Management remained upbeat on demand conditions across the Company’s core sectors and expects backlog to continue to trend toward lower-risk work given the ongoing industry shift toward progressive model contracts. The Company reiterated that it is comfortable that the three remaining legacy projects can be completed with potential future losses remaining within the parameters disclosed with Q2/24 results.
“We continue to see attractive value in ARE and expect a higher quality backlog and continued growth in recurring revenue programs to support better earnings quality in future periods, providing meaningful valuation upside over the medium term.”
While reiterating its legacy initiatives, including both LRT projects and the Gordie How Bridge in Windsor, Ont., continue to progress well, the Toronto-based construction company also expects its backlog to double over the next 18 months, according to Mr. Murray.
“A significant number of projects in a PDB [Progressive Design Build] format are approaching a more definitive phase of their execution,” he said. “Combined with other projects, management sees backlog doubling over the next 18 months, however, it noted that it would expect backlog duration to extend, and did note that certain of these projects could issue firm orders in phases, especially for larger contracts.”
“Earnings growth and predictability will be more a function of a larger business, driven by project wins and backlog growth as well as the expansion of the Utilities business, organically and through M&A, as well as small tuck-in M&A around the Canadian construction business, while Construction margins are expected to remain in-line at ~8.0%, which remains near the top of the industry.”
Believing its time for its Construction segment to get out of investors’ “penalty box,” Mr. Murray hiked his one-year target for Aecon shares to $29 from $21 with an “outperform” recommendation (unchanged), citing revisions to his approach to valuing its Concessions segment, higher cash expectations and an expansion of his target trading multiple for Construction. The average target on the Street is $21, according to LSEG data.
“Our discussions during our NDR and over the past several months suggest that we are reaching an inflection point for Aecon shares as the overhang from the legacy projects looks to be reduced with a higher proportional of lower risk projects (PDB) and recurring revenue (Utilities) improving earnings predictability and stability,” he said. “Given Aecon’s end markets in high-demand and specialized sectors with high barriers to entry (Nuclear), arm’s length investments (Utilities investment by Oaktree at 9.3 times) and an increasing focus on ROIC/ROCE and free cash flow per share generation, we believe multiple expansion is warranted. As we have seen with other similarly challenged peers, the process of moving beyond legacy projects where the risk pendulum had swung too far can provide significant returns as multiples normalize.”
AECON GROUP INC
19.33+6.26 (47.90%)
YEAR TO DATE