Aecon Group has price target lowered at IA Capital

Following the company’s Q2 results, Industrial Alliance analyst Naji Baydoun has dropped his price target on Aecon Group (Aecon Group Stock Quote, Chart, News, Analysts, Financials TSX:ARE).

On January 26, ARE reported its Q2, 2023 results. The company posted Adjusted EBITDA of $16.7-million on revenue of $1.17-billion. While the topline was four per cent better than the same period in 2022, EBITDA fell sharply, from $38.5-million in last year’s second quarter.

“With significant new contract awards in the second quarter, backlog of $6.9-billion and recurring revenue programs continuing to see robust demand, Aecon is well positioned to achieve further revenue growth over the next few years,” said Jean-Louis Servranckx, president and chief executive officer, Aecon. “We are focused on closing out four challenging legacy projects while achieving solid execution on our other projects and selectively adding to backlog through a disciplined bidding approach that supports long-term margin improvement, and a strategic focus on project and concession opportunities delivered under more collaborative models, and linked to decarbonization, sustainability and energy transition.”

Baydun said the company is currently working off legacy projects to improve profitability.

“Its four large legacy fixed-price contracts so far this year; these projects have put a substantial dent in near-term profits, but most are expected to be completed over the next ~12 months with ~$700M of work related to these contracts left in backlog (~$800M in Q1/23). We expect material profitability improvement once those legacy projects are cleared from the backlog and see a path for margins to gradually return to a normalized level. Management noted that excluding the impact of these projects, ARE would have posted an ~9.6% Adj. EBITDA margin in Q2/23 and TTM Adj. EBITDA would have been ~$375M. Overall, although we recognize near-term risks from continued losses on select projects, we see a path for ARE’s portfolio to generate >7% Adj. EBITDA margins, which would imply >$350M/year of run-rate EBITDA potential (2024E consensus: ~$260M).”

In a research update to clients dated July 28, Baydoun maintained his “Buy” rating on Aecon Group, but lowered his one-year price target on the stock from $18.00 to $16.00, implying a return of 60.3 per cent at the time of publication.