Aecon Group sees a target drop from Paradigm Capital

Paradigm Capital analyst Corey Hammill has a bit more caution regarding Aecon Group (Aecon Group Stock Quote, Chart, News, Analysts, Financials TSX:ARE), maintaining a “Buy” rating but reducing his 12-month target price from $24/share to $22.50/share for a potential return of 46 per cent in an update to clients on Thursday.

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

Hammill’s updated analysis comes after Aecon released its fourth quarter financial results which were headlined by $1.1 billion in revenue, up one per cent year-over-year and remaining in line with the estimate set by both Paradigm Capital and the consensus.

“Management is focused on choosing projects to drive margins higher, thereby increasing profitability,” Hammill said. “The balance sheet has considerable net cash, providing meaningful flexibility to pursue capital intensive public-private partnerships.”

However, the company also reported EBITDA of $61 million, down 29 per cent year-over-year and significantly missing on the consensus estimate of $84 million and the Paradigm Capital projection of $86 million, with Hammill noting it to be the first miss on EBITDA for the company in 14 quarters.

Aecon took steps in its backlog numbers, with its $6.2 billion report producing three per cent sequential growth. In terms of contracts, Aecon reported $3.7 billion in new business, up from the $3.3 billion it reported in 2020, with $1.2 billion in new contracts getting awarded in the fourth quarter alone for a 50 per cent year-over-year increase.

The volume of new business is a reason why management holds a positive outlook for 2022, headlined by its contract with Go Transit, which is its biggest yet. The company’s current bidding pipeline is at $50 billion, an increase from $40 billion, which Hammill said represents government focus on infrastructure spending and economic recovery post COVID.

“Aecon’s 2021 results show steady revenue growth and a strong, diversified backlog at year-end,” said Jean-Louis Servranckx, President & Chief Executive Officer of Aecon Group in the company’s March 1 press release. “The infrastructure market in Canada continues to be strong and we are well positioned to capitalize on this momentum. The overall outlook for 2022 is positive, supported by the strong level of backlog and new awards during 2021 and into early 2022, and the strong demand environment for Aecon’s services, including recurring revenue programs, as we safely and sustainably continue our drive to be the number one Canadian infrastructure company.”

After completing 2021 with revenue of $3.98 billion, Hammill forecasts continued growth for Aecon going forward, as he revised his 2022 projection to $4.22 billion (previously $4.12 billion) for an implied year-over-year increase of 6.1 per cent, which is slightly ahead of the $4.15 billion projected by the consensus. Looking ahead to 2023, Hammill forecasts a jump to $4.26 billion in revenue (previously $4.11 billion), suggesting a year-over-year increase of 0.9 per cent as the figure slightly trails the consensus estimate of $4.33 billion.

From a valuation perspective, Hammill maintains a standard of 0.3x across fiscal years for the EV/Sales multiple, coming in well ahead of the construction peer group average of 2.1x in the final year of projection.

By contrast, where Hammill’s revenue projections increased, his EBITDA projections went in the opposite direction. After finishing 2021 at $239 million for a margin of six per cent, Hammill lowered his 2022 EBITDA projection from $290 million to $272 million for a margin of 6.4 per cent, with the figure being slightly ahead of the consensus target of $262 million. Looking ahead to 2023, Hammill forecasts EBITDA of $279 million (previously $292 million) for an implied margin of 6.6 per cent, though the figure comes in behind the consensus expectation of $282 million.

Hammill projects the company’s EV/EBITDA to drop to approximately 4.8x in the final year of projection, again presenting a discount to the 12x construction peer group average for the same year.

Overall, despite the target drop, Hammill isn’t completely concerned about Aecon’s future, with a recent eight per cent pullback providing an attractive entry point.

“Despite the occasional quarterly profit miss, we remind investors that Aecon has developed a solid track record of meeting or beating Street expectations,”  Hammill said. “The nature of construction means there will be negative surprises, but overall Aecon’s recent track record remains solid.”

Aecon Group’s stock price has dropped by 16.7 per cent over the last 12 months and 7.1 per cent since the start of 2022. After hitting a 52-week high of $21.94/share on September 13, the stock has been dropping, and is presently at a 52-week low of $15.82/share.