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Aecon Group Inc
ARE-T
BUY ON WEAKNESS
Sep 25, 2024
Stock price when the opinion was issued
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Started dipping in this week. Got almost cut in half from levels late last year. His fundamental analyst likes the potential opportunities. Will probably go up and down quite a bit. As long as it doesn't crack the low point where he was just buying it, then he'll stay in the trade.
May not make it back to $30, but has some upside. A "spendy" government got in, which means infrastructure, and that's good for this name. Yield is 4.17%.
If you own it, not the end of the world. Trades at pretty steep discount (16x PE) to peers (closer to 22x), as it's less profitable and less growthy. Interesting segment called "Concessions", where they take partnership stakes in infrastructure investments. Yields ~4%, and grows dividend about 6% a year.
Better choice is WSP.
It is starting to roll off the legacy projects which have fixed cost price contracts which lead to losing money. They are still having an impact but the company is getting into variable cost contracts so they can make money even with cost increases. There is a big backlog and good potential. He noted that construction backlogs don't always translate into profits.
Owns a smaller position, as it tends to be high-torque. Smaller cap and cyclical, so we've seen volatility in the name. Company says it won't take on any more large, fixed-price contracts. Record backlog, much of it public sector (more stable than private). Fingers in almost every nuclear project in Canada. Likes its domestic exposure, where she can understand Canadian government and policies.
Yield of almost 4%, which wasn't cut even when things looked really bad during 2022.
Over 12 months, Aecon could do better. It's more exposed to Canada, more revenues from Canada, whereas Atkins sees more global revenues. But 20% of Atkins' revenues come from nuclear which is booming. Atkins trades at a discount to peers. Aecon's backlog will expand a lot from Build Canada.
Their last quarter boasted a record backlog. By end of this year, the legacy projects that have held them back will disappear. If there are a lot of expansion projects, ARE will certainly benefit and profits will rise in coming years. Pays a 3.3% dividend, not bad.
(Analysts’ price target is $23.27)Has been more volatile than usual. Plagued by legacy fixed-price contracts from pandemic era, but we're at the tail end of that. Now less than 1% of record backlog are legacy contracts. Stock price could go lower from here due to additional losses, but should recover quickly.
Lots of growth in the utility space, nuclear refurbishment in Ontario. Recent US acquisitions great diversifiers. Yield is 3.02%.
Lots going on in the construction and infrastructure space, and this name will benefit. Trades at significantly lower multiple to peers, but that multiple should slowly increase over time as they get rid of cost-overrun projects. It'll be just in time for large-scale infrastructure and nuclear (where Ontario's at the forefront globally) projects.
Stars are aligning for a great few years on free cashflow, multiple growth, and investor interest. Yield is 3.10%.
ARE provides construction and infrastructure development services to private and public sector. Nuclear power certainly does seem like it is a growing part of the business, now at 19% of construction revenues over the last twelve months. Recent second quarter financials were not good, however, the stock jumped as ARE announced a 5% buyback and numerous analysts upgraded their ratings on the expectations that the "worst is likely behind." ARE does have a large backlog at $6.19 billion, and its balance sheet is net cash positive. It is still quite cheap at 15x forward earnings despite being up 89% over the last year and paying a 3.7% yield. If revenue and earnings growth begin to recover in the second half of 2024, the stock could be interesting at this valuation and yield.
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