My guess is that he is unaware of the likely additon of ARE to the Index. GLTA In response to a “huge” rise in share price, National Bank analyst Maxim Sytchev now thinks the risk-reward proposition for Aecon Group Inc. has “normalized,” leading him to lowered his recommendation to “sector perform” from “outperform” and warn investors “2026 forecasts are great but we still need to get through 2025.”
“With government goodies being doled out at the provincial/federal levels and focus on fringe issues like bike lanes that would typically be the purview of municipal-level conversations, we surmise that having a marquee project operational in the short term is unlikely (in addition to previously telegraphed 6 months heads up that Metrolinx would need to give to the province; suggesting that H2/25E is a more realistic timeline, hopefully),” he said in a research report released Wednesday.
“Well, that means that Q4/24E and H1/25E impute three quarters of haggling around who is paying for what and how much. And because the provincial government is disbursing stimulus on the one hand, why would it be ‘gentle’ when it comes to final negotiations? That means that the potential of working capital drag/write-downs remains and while the shares, of course, rallied on the back of Q2/24 discourse that perhaps it’s not “as bad as expected”, there is a big difference between the same outcome while shares were trading at $14 vs. $28 now, with the vast majority of share price appreciation attributed to MULTIPLE expansion. Expectations of ARE’s TSX 60 inclusion is also front and centre (i.e., no longer a catalyst).”
Mr. Sytchev now sees the Street’s expectations for the Toronto-based construction company as “aggressive” and sees notable downside risks. He also emphasized its valuation now approaches peer Bird Construction Inc. “despite higher tail risks.”
“The pullback in the magnitude of backlog expected to be recognized in the next 12 months has moved down 13 per cent quarter-over-quarter (total backlog also fell below $6 bln for the first time since Q1/21), clouding the near-term revenue outlook somewhat,” he said. “Granted, the ‘quality’ of the backlog has certainly improved with the wind down of the fixed price portfolio, but ultimately the revenues will need to come from somewhere. Given the issues seen in this portfolio, investors will no doubt continue to scrutinize Aecon’s execution for the foreseeable future. In this context, Aecon’s 6.7 times EV/2025 estimated EBITDA multiple reflects much higher expectations and is very close to BDT at 7.8 times, a company which has brought investors far less unpleasant surprises over the last few years.”
While acknowledging he may be “taking our foot off the gas too early,” Mr. Sytchev said the risk/reward skew is now balanced, despite raising his target for Aecon shares to $30 from $28 after introducing his 2026 forecast. The average target on the Street is $30.09, according to LSEG data.
“What can go wrong? Stepping away too early from BDT/CIGI was the wrong call in early 2024. Are we repeating the same mistake? We wish we had an unequivocal answer to that question. We simply do not know,” he said.
“That being said, a simple risk/reward framework can provide some parameters for decision-making. 1) Let’s say there is no write-down over the coming nine months and working capital is not an issue despite some cautious language from management on the Q3/24 call. We deem this unlikely given the lack of news on the large projects’ commissioning timelines and our experience that write-downs typically take place at the very end of contract completion and Q4s as there is a greater level of scrutiny from auditors / calibration exercise for the subsequent year. Again, if nothing happens, great, don’t forget shares are up close to 2 times in seven months, so at least part of that dynamic is already reflected in the current set-up. 2) There is another $50-$100-million write-down, either EBITDA or working capital, within the previously telegraphed envelope; well, bulls can say it does not matter and the market is forward-looking (it is) but why take a chance that there is a small probability of more protracted negotiations, a warranty period uncovering issues on something that’s five years too late, etc. So, in a sense, there is some incremental upside to let’s say BDT’s 2026E EV/EBITDA if applying to ARE (in the 10-15-per-cent range) or equivalent to more downside if things get delayed a bit, especially in light of potentially the Street being too aggressive with 10-per-cent year-over-year top-line growth in 2025.”