Aecon Group Inc T.ARE

NBF report

[Gabriel]

Aecon Group Inc.

Clean Q = greater re-rate

Q3/24 results — good performance

Q3/24 results recap — +7% beat on EBITDA vs. consensus as four fixed-price “legacy” projects are breakeven vs. previous string of losses

Revenue came in at $1,275 mln (+3% y/y), +2% above Street at $1,251 mln (NBF at $1,268 mln), despite lower industrial operations revenue in the Construction segment (-$108 mln y/y) due to tough comps from Q3/23 following the completion of a large pipeline construction job in Western Canada. Consolidated Adjusted EBITDA came in at $126.9 mln (imputing 10.0% margin — the highest margin for the company in 10 years), above NBF estimate at $106.3 mln and Street at $119 mln; The four construction projects that marred prior quarters are now breakeven, according to the company (more in outlook below) vs. a -$91.1 mln in Gross Profit in Q3/23. Adjusted EPS came in at $0.86, above our forecast at $0.66 (Street at $0.78 but there is a wide range).

Conference call takeaways — pro-forma operating profile significantly de-risked

1) Fixed price projects = largely status quo; 2) Progressive design-build projects will de-risk the backlog; 3) U.S. nuclear provides a wide opportunity set; further M&A is likely.

Valuation & recommendation — a cleaner earnings profile is conducive to further multiple expansion

With the pro-forma earnings profile significantly de-risked, we expect steady margin expansion moving forward; our forecasts impute potential losses; if those do not materialize, the numbers would move higher. Furthermore, revenue visibility is also improved with the multi-year nature of incoming progressive design-build projects and exposure to the thematically growing nuclear and utilities space (now 45% Construction revenues). We rate ARE shares Outperform and raise our price target to $28.00 (from $25.00) on higher EBITDA projections; our target is derived using a 6.0x / 7.0x 2025E EV/EBITDA multiple on core construction / JV assets and $2.33 for ARE’s Bermuda stake.

[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

[Alexcanada]

thanks Gab for the report. BTW, I'm buying some BCE this morning

[nedstar71]

I get it somewhat if you're in it solely for income but that stock has become the definition of dead money for the foreseeable fuure as of this morning imo

[Gabriel]

While I had sold most of my position in Atkins and Bell to add Aecon before the earnings report, the sale of the dead money sports unit of Bell and its acquisition ot the fibre business for about the same amount solves the growth problem of Bell by getting a foot in the US market. The fibre market in Canada is saturated but not in the US.