TSX:ARE - Post Discussion
Post by
retiredcf on Nov 06, 2024 11:12am
TD Report
Got it right this time. GLTA
UPGRADING TO BUY; CLEAN Q3/24, SOLID GROWTH OUTLOOK AND COMPELLING VALUATION
THE TD COWEN INSIGHT
We are upgrading ARE to BUY (from Hold). PT now $35.00 (was $23.00) on an adjusted approach to valuation. Concerns regarding ARE's fixed-price legacy projects kept us cautious. However, ARE's recent quantification of maximum potential legacy project risks and a clean Q3/24 provide us considerable comfort. Meanwhile, a solid revenue growth outlook and ARE's compelling valuation support our upgrade.
Event
ARE's Q3/24 adjusted EBITDA of $126.9mm was above consensus/TD at $119.9mm/ $123.4mm. Encouragingly, Aecon reported no additional operating loss related to its three large fixed-price legacy JV projects. Meanwhile, management reaffirmed its view on the potential for future additional financial risks to ARE, if any, on its legacy projects at no more than $125mm to the end of 2025.
Impact: POSITIVE
Reported Q3/24 Construction segment adjusted EBITDA was $114.1mm, in line with TD at $113.9mm. On a normalized basis, the segment's adjusted EBITDA margin was 9.5%. Concessions segment adjusted EBITDA was $22.3mm vs. our $21.1mm forecast.
Backlog totalled $5.98bln (-3.3% q/q and -3.6% y/y). That said, Aecon's eight awarded collaborative projects worth ~$6bln that are not yet reflected in the backlog. Three of these (GO Rail Expansion On-Corridor Works, Scarborough Subway Extension, and Darlington SMR) make up a significant portion of the total and are expected to move into construction in 2025, while the remaining five are expected to enter construction between late 2025 and 2026. Meanwhile, we see overall demand for ARE's services as strong.
Attractive Valuation: Despite very strong recent share-price performance, on an ex- Concessions and ex-legacy fixed-price project losses impact basis, ARE is trading at 6.1x our 2025 adjusted EBITDA estimate. This represents a notable discount vs. its closest Canadian peer BDT-T (7.4x our 2025E EBITDA), and vs. ARE's broader construction peer group (average of 10.6x 2025E EBITDA). With continued strong execution and legacy JV projects backlog run-off, we expect ARE's valuation discount versus peers to narrow.
Our 2024/2025 adjusted EBITDA estimates are essentially unchanged. However, we have adjusted our approach to valuation (prior approach now seen as overly punitive). We now value ARE on normalized adjusted 2025E ex-Concessions EBITDA (i.e., add back $95mm of legacy project losses included in our 2025 forecast before applying our target multiple of 8.5x, which is up from 7.75x, previously), although we do subtract $125mm (maximum estimated legacy losses) from our target equity value to reflect ongoing legacy project risk.
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