Aecon Group Struggles To Keep Up With TSX

Aecon Group Inc is a construction and infrastructure development company in Canada. The company provides a wide range of integrated services including project financing, design, construction, materials supply, engineering, procurement, and fabrication. 

Aecon operates through a diversified construction (more than 30% of EBITDA) as well as an attractive concessions (nearly 70%) portfolio. Its construction business includes industrial (24% of TTM revenues), utility (17%), nuclear power (11%), heavy civil (14%), urban transportation system (18%), and roads and highways (16%). Its concessions portfolio includes equity ownership in attractive projects. 

For more than a century of existence, Aecon has become an integral part of Canada’s infrastructural success story, building hundreds of factories, roads, sewer systems, power plants, mine sites, offices, hotels, casinos, etc. in the country. The company has operations in Canada, the U.S., and internationally.

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Revenue Growth & Market Exposure

Aecon has established strong industry ties and a solid reputation for quality and timely execution of projects as Canada’s leading infrastructure company. The company’s pipeline of projects includes federal and key provincial infrastructure programs and other projects diversified by geography, sector, contract size, and type. Aecon has developed a strategy of building strong alliances including joint arrangements and public-private partnerships and remains well-positioned to capture emerging growth in key sectors.

Given, Aecon’s ability to provide a wide range of construction, contracting, and infrastructure development services, the company has become a one-stop shop for its clients looking for integrated solutions.

The company’s presence across the entire value chain from site clearing to final construction provides it an edge over the competition. Its revenue in the latest quarter continued to be negatively impacted by COVID-19, particularly in certain end-market sectors. But the company witnessed overall growth overall in the Construction segment, driven by higher revenue in nuclear and utilities operations, partially offset by lower revenue in urban transportation systems, and civil and industrial operations.

New contract awards of only $213 million were booked in the first quarter of 2021 compared to $912 million in the same period in 2020. The company ended the quarter with a pipeline of  $5.9 billion compared to $6.9 billion in the year-ago period. Aecon’s revenues have grown at 9% CAGR in the last three years.

Aecon can be credited with the successful implementation of some of the most complex projects including the Bermuda International Airport, the Eglinton Crosstown LRT, the Darlington Nuclear Refurbishment in Ontario, and many more. The company is also looking at the U.S. infrastructure and construction market as a strategic opportunity for earnings stability and growth.

Given its large scale, diversification, and past performance, Aecon has become a partner of choice on major projects across Canada. Significant infrastructure investment opportunities across Canada and a strong pipeline act as strong tailwinds for the company. The trend of government investment across Canada as well as by the private sector is expected to continue.

Dividends

Aecon is a Canadian Dividend Aristocrat with a history of providing sustainable dividend growth to its shareholders. The company last raised its quarterly dividend by more than 9%. Aecon has compounded its dividend growth annually at an impressive 12.3% over the last decade. The company sports an average annual yield of 3.8% and a reasonable dividend payout ratio of 66% currently. It paid $160 million in dividends in the last five years.

Over the years, this industrial has built a solid, diversified, and resilient business model. It has developed a large scale in its core markets and has achieved significant geographic and market diversity. The company is highly diversified across various construction sectors and enjoys a strong base of recurring revenues which further adds stability to cash flows.

The company also has no debt maturities until the second half of 2023. Aecon’s rich experience across different segments and geographies allows it to participate in multi-disciplinary projects. Positive infrastructure investment trend across civil infrastructure, urban transportation systems, nuclear power, and utility by the Canadian government, as well as private players, acts as a strong tailwind for the company.

Recurring revenue in the utilities sector is expected to grow based on key client investment plans in telecommunications and power-related work.

Aecon is in a good position to benefit from an active bid pipeline of over $40 billion and a high margin long-dated backlog. A strong and liquid balance sheet further supports growth. Global expertise, solid infrastructure development, and a strong backlog position Aecon to generate better EBITDA margin growth.

Government investment in infrastructure should also act as an economic stimulus as part of COVID-19 recovery plans.

Aecon Group (ARE) historical yield
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Competition

The company operates in highly competitive markets with large contractors, mid-sized as well as smaller companies. The company also faces intense competition from foreign companies trying to enter the Canadian market. Aecon competes with the likes of SNC-Lavalin, which is Canada’s largest engineering and construction company by revenue.

It also competes with WSP Global, Stantec Inc, Dirtt Environmental Solutions, etc. Stantec is a top-tier global design firm with a presence in architecture, environment, community development, and energy segments. Aecon’s integrated platform provides an operational advantage when compared to its peers.

Bottom Line

The company has been a primary player in Canada’s infrastructure development story with a solid experience of more than 100 years and rich expertise in the construction field. The company enjoys a recurring and diversified revenue stream across various construction sectors and an attractive concessions portfolio.

As Canada’s premier infrastructure company, Aecon is well-positioned to benefit from the growing infrastructure spends in Canada and strong bidding activity in the near future. The company maintains a positive outlook for 2021 driven by a strong backlog, recurring revenue programs, and the pipeline of bidding opportunities for new work.

Despite this overall positive outlook, the COVID-19 pandemic is expected to continue to have some impact on Aecon’s businesses, particularly, aviation and construction.

ARE vs TSX vs SP500 2021
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Aecon Group (ARE) historical pe
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