Aecon Group upgraded to a Buy, says iA Capital

A clearer path to higher profitability and a de-risked balance sheet are just a couple of the reasons iA Capital Markets analyst Naji Baydoun is giving the green light on Aecon Group (Aecon Group Stock Quote, Charts, News, Analysts, Financials TSX:ARE). In a Thursday report, Baydoun changed his rating on the stock from “Hold” to “Buy,” saying Aecon is heading into a key transition year, while a recent asset sale removed a funding overhang on shares.

Aecon Group, which has construction infrastructure solutions and development, financing and operations and management services, announced its fourth quarter 2022 financials on Tuesday. The company reported revenue of $1,266.8 million compared to $1,088.6 million a year earlier and adjusted EBITDA of $67.5 million compared to $61.3 million a year ago. For the year, revenue was up 18 per cent to $4,696 million and adjusted EBITDA was down to $219.2 million compared to $238.9 million for the previous year.

“Aecon achieved record revenue in 2022 and is confident in further revenue growth over the next few years supported by growing recurring revenue programs, the current level of backlog, the volume of new awards during 2022 and into early 2023, and ongoing demand for its services,” said Jean-Louis Servranckx, President and CEO, in a press release.

Baydoun said the $1,267 million Q4 topline was slightly ahead of his estimate at $1,128 million and the consensus call at $1,163 million, while adjusted EBITDA at $67.5 million was also a bit above his and the Street’s forecast at $66 million. Baydoun said the higher than expected revenue was due to strong construction activities across several of Aecon’s operations while lower corporate costs helped the results, as well.

Baydoun said Aecon exceeded expectations on contract awards for the quarter, securing about $1.3 billion in new contracts for a total of $4.8 billion in new contracts for the year, representing a year-over-year growth rate of 29 per cent.

“The Company’s recurring revenue streams reached ~$850M/year as of Q4/22 and we see a path for them to grow to ~$1B/year, thus de-risking ARE’s growth profile (excluded from backlog),” Baydoun wrote.

Aecon currently sports a dividend yield of 6.7 per cent, and while the company declined to increase it despite the recent revenue growth, Baydoun said it’s likely a prudent move, as the company needs to manage its payout ratio.

On Aecon’s recently announced sale of its Ontario roadbuilding business for $235 million in cash, Baydoun viewed it positively, saying it’ll help with ARE’s balance sheet and capex profile.

With the new “Buy” rating, Baydoun also raised his 12-month target from $13.00 to $16.00, good for a projected return including distribution o $52.3 per cent at the time of publication.

“With increased visibility on the remaining potential impact of the large-scale legacy fixed-price projects, incremental colour on potential normalized margins, a clearer path to substantially higher profitability, and a de-risked balance sheet via an asset sale at attractive valuations, we are materially raising our financial forecasts on ARE; accordingly, we are increasing our price target,” Baydoun wrote.