Aecon Group earns price target raise at Industrial Alliance

After a positive second-quarter report, iA Capital Markets analyst Naji Baydoun has built up higher expectations for Aecon Group (Aecon Group Stock Quote, Chart, News, Analysts, Financials TSX:ARE). In a report issued Friday, July 23, the analyst reiterated his “Buy” rating while raising his target price by $0.50 to $23.50/share, implying a projected return of 30.9 per cent at the time of publication.

Headquartered in Toronto, Aecon Group Inc. provides construction infrastructure solutions, as well as development, financing, and operations and maintenance services to private and public sector clients in Canada and internationally.

Baydoun’s revised projections come after Aecon Group outperformed second-quarter projections, driven by stronger than expected contributions across the board.

“In our view, the Q2/21 results and management commentary set a positive tone for the rest of 2021, and we are optimistic that additional large-scale contract awards could materialize in the next twelve months,” Baydoun said.

Aecon reported second-quarter revenues of $971 million, 10.7 per cent ahead of the iA Capital Markets projection of $877 million, with an adjusted EBITDA of $61 million to beat iA’s projection of $50 million, fuelled by higher year-over-year volumes and margins in several construction operations, as well as better than expected contributions from the Concessions business, despite its Bermuda operations remaining below run-rate levels.

Following a slow opening quarter of 2021, Aecon was awarded $1.6 billion in new contracts in the second quarter, marking the company’s strongest quarter in three years while shattering iA Capital Markets’ expectation of $700 million and giving the company a $6.5 billion backlog.

“During the quarter, new awards resulted from strong demand for Aecon’s services across Canada in smaller and medium sized projects, and also incorporated a number of multi-year projects in the nuclear, civil operations and urban transportation systems, and industrial sectors – illustrating the diversity of Aecon’s backlog by scale, duration, geography, and sector,” said Jean-Louis Servranckx, Aecon’s President & Chief Executive Officer, in the company’s July 22 press release. “Aecon’s overall outlook for 2021 remains positive as construction continues on a number of projects that ramped up in 2019 and 2020, backed by the level of backlog and new awards achieved during the first half of 2021 and the strong demand environment for Aecon’s services going forward, including recurring revenue programs.”

The updated results have led to revised projections going forward from Baydoun, with 2021 revenue now forecast to reach $4.04 billion, a 10.8 per cent year-over-year increase from the reported $3.644 billion in revenues for 2020. Baydoun expects incremental growth to continue over the next two years, setting annual revenue projections of $4.092 billion for 2022 and $4.113 billion in 2023.

Per Baydoun, EBITDA is also forecast to grow incrementally in the same timeframe, with the 2021 projection now set for $267 million, a jump from 2020’s reported $260 million. The next two years are projected to show similar EBITDA growth, with 2022 forecast to hit $275 million, while 2023 is projected to yield $279 million.

Consensus EV/EBITDA multiples are forecast to remain relatively consistent in the coming years, with 2021’s forecast of a 5.8x multiple coming in slightly ahead of 2020’s 5.6x multiple before a projected drop to 5.2x in 2022.

iA Capital Markets projections for the Price to Free Cash Flow multiple fluctuate a bit more, with 2021 forecasting a jump to 14.1x from 2020’s 10.6x before dropping to a projected 9.3x for 2022.

Highlights of the company’s second quarter include booking a $350 million joint venture with SGT (a partnership between Framatome and United Engineers & Constructors) to replace steam generators within two units of Bruce Power’s Nuclear Generating Station in Tiverton, Ontario, as well as a $272 million joint venture with Oscar Renda Contracting of Canada Inc. to create an upgrade for the City of Winnipeg’s North End Sewage Treatment Plant.

In May, the company also booked a $729.2 million project with Infrastructure Ontario and Metrolinx as part of the West End Connectors consortium with Dragados Canada Inc. and Ghella, with the project being the first phase of work for a 9.2-kilometre extension of the Eglinton Crosstown Light Rail Transit (LRT).

The renewed company optimism has Baydoun feeling more confident about Aecon’s prospects going forward.

“ARE offers investors [a] stable balance sheet and cash flow fundamentals, supported by a strong backlog, exposure to the Canadian construction sector, with upside potential from additional infrastructure investments, an attractive dividend, and a discounted valuation compared with peers,” he said.

At press time, shares of Aecon Group were down 2.58 per cent to $19.99.