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Aecon stock is a Buy, says Laurentian

A dustup between an Aecon Group (Aecon Group Stock Quote, Charts, News, Analysts, Financials TSX:ARE) consortium and the Government of Ontario’s transportation investment agency may be making the news right now, but investors shouldn’t let it affect their approach to the stock. That’s according to Laurentian Bank Securities analyst Jonathan Lamers, who provided a note to clients on Tuesday where he reiterated a “Buy” rating on Aecon Group, saying the project in question is a legacy one expected to be completed by the end of the year.

Metrolinx, which coordinates the province’s investment in transportation projects in the Toronto and Hamilton area, released on Tuesday a statement regarding the Eglinton Crosstown light rail transit (LRT) project and the consortium Crosslinx Transit Solutions (CTS), made up of four companies, including Aecon, which is building the LRT. 

Metrolinx said it was informed by CTS that they intend to litigate and stop working with the Toronto Transit Commission (TTC), which will operate the LRT. Metrolinx called the move “another unacceptable delay tactic” by CTS, saying it has been working with the TTC for years to get the LRT ready for customer service and charged CTS with poor performance with the project.

“Metrolinx will defend this latest legal challenge by CTS as we have done several times before. The cost of CTS’s delays are for CTS to bear. Metrolinx is already withholding significant payments for poor performance. We will continue to hold CTS to account and examine every remedy under the Project Agreement to ensure the project is delivered to a high quality and that it is safe and reliable to open,” the statement read.

Lamers’ take on the issue is that CTS has been providing training to the TTC on operating the LRT in preparation for handover but that Metrollinx currently doesn’t have an agreement in place with the TTC concerning the operators.

Lamers judged the impact of the conflict to be “slightly negative” for ARE but ultimately immaterial to his valuation.

“Our concern is there remains no scheduled date for project handover to the customer, and continuing dispute between the Consortium and Metrolinx suggests there could be further delays to the project’s handover, generally expected to be later in 2023,” Lamers wrote.

The analyst added that Metrolinx’s withholding of payments to CTS may help explain the unusually large working capital outflow Aecon posted in its first quarter report.

With his “Buy” rating, Lamers maintained a target price on Aecon of $19.00 per share, which at press time represented a projected return of 47.5 per cent.

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