North American Construction Group Ltd.
(NOA-T, NOA-N) C$18.41 | US$14.55
Upgrading to BUY on Valuation, Diversification Event
We are upgrading North American Construction Group (NACG) to BUY (from Hold previously) as a result of recent Omicron-related weakness and growing confidence on its diversified operations.
Impact: POSITIVE
Core Operations Extremely Resilient to Lower Commodity Prices: We see the recent share-price weakness resulting from concerns around the Omicron variant as a buying opportunity, and would note that oil sands production is arguably among the most resilient to lower commodity prices across the North American production base, with our E&P research colleagues calculating breakevens for the oil sands mining projects that NACG has exposure to in the range of US$39/bbl to US$53/bbl. To this end, North American's MSA at Imperial's Kearl mine is coming up for renewal in 2022 and we expect this to be renewed without any issues.
Growing Confidence on Diversified Opportunities: NACG's first significant project outside the oil sands (a gold mine in Ontario) appears to be progressing in line with internal projections/guidance and its 49% interest in the Nuna Group, which combines NACG's operational execution with strong indigenous partnerships, appears to be a recipe for commercial success. Our NAV previously assumed a step- down in diversified revenues upon the completion of its gold mine project in Ontario at the end of 2022, but we are becoming increasingly confident that NACG can backfill this revenue and deliver further growth with new opportunities.
Potential for a Dividend Increase: We highlight management's 2022E free-cash- flow guidance range of $95 million-$115 million, record contractual backlog of $1.9 billion, manageable leverage (2022E ND/Adjusted EBITDAS of 1.5x), and strong crude oil commodity price backdrop in the context of its current annualized dividend commitment of $4.5 million.
TD Investment Conclusion
Our confidence in the management team's ability to execute on both its core oil sands operations and diversification strategy remains strong, and view the recent pullback in the share price, as well as NACG's underperformance relative to the peer group (see Exhibit 1) as a buying opportunity. NACG is trading at a 2022E EV/ EBITDAS multiple of 3.4x, below its five-year average of 4.4x. As a result, we are upgrading NACG to BUY (from Hold previously), with an increased target price of $25.00 ($23.00 previously).