On today’s TSX Breakouts report, there are 48 stocks on the positive breakouts list (stocks with positive price momentum), and two securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is on the positive breakouts list - Aecon Group Inc. (ARE-T).
In 2022, Aecon’s share price tumbled 46 per cent. However, this laggard has pivoted to a leader with its share price up 34 per cent year-to-date. Aecon is the second best performing stock in the S&P/TSX SmallCap Industrials sector year-to-date.
A brief outline on Aecon is provided below that may serve as a springboard for further fundamental analysis when conducting your own due diligence.
The company
Toronto-based Aecon is a construction and infrastructure development company serving both the private and public sectors.
The company has two main reporting segments: construction and concessions. The construction segment represents the majority of the company’s revenue, accounting for 98 per cent in 2022.
There is seasonality in the company’s operations with the first quarter the weakest, and the second half of the year is typically stronger than the first half.
Quarterly earnings results
After the market closed on Feb. 28, the company reported better-than-expected fourth-quarter financial results.
Revenue was $1.267-billion, up 16 per cent year-over-year, and ahead of the consensus estimate of $1.162-billion. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) came in at $67.5-million, surpassing the consensus estimate of $66-million. The company reported an adjusted EBITDA margin of 5.3 per cent, down from 5.6 per cent reported during the same period last year. Earnings per share came in at 26 cents, topping the Street’s estimate of 22 cents. As at Dec. 31, the backlog, which represents future revenue for the company, stood at $6.296-billion up sequentially from $6.275-billion as of Sept. 30.
Last year, the stock was under significant pressure arising from costs related to four large fixed-price legacy contracts.
On the earnings call, president and chief executive officer Jean-Louis Servranckx provided an update on these projects, “As a reminder, those four projects entered into in 2018 or earlier by joint ventures in which Aecon is a participant are being negatively impacted due to additional costs for which the joint ventures assert that the owners are contractually responsible, including four among other things, unforeseeable site conditions, third-party delays, COVID-19, supply chain disruptions, and inflation related to labor and materials. In 2022, due to the factors noted that impacted this project during the year. Aecon recognized an operating loss of $120 million related to these four projects. Aecon and our partners continue to work vigorously towards resolution of compensation for this impact with the respective owners of this project. And we are fully focused on pursuing all avenues for adequate and timely compensation with the objective to reach fair and reasonable settlement agreements and to move forward towards project completion in each case.” Three of the four legacy contracts are expected to be completed between the end of 2023 and mid-2024. The fourth project will not be completed until 2025.
On March 1, the share price rallied over 8 per cent on high volume with over 3 million shares traded. The historical three-month daily average trading volume is approximately 680,000 shares.
However, it wasn’t the quarterly earnings results so much as news released that day that the company was selling its Aecon Transportation East roadbuilding business to Green Infrastructure Partners Inc. for $235-million. Proceeds from the sale will be used to pay down its debt and strengthen its balance sheet.
Investment thesis
- Infrastructure spending.
- Attractive valuation. The stock is trading at a discount relative to historical levels.
- Price weakness has historically represented a buying opportunity. Over the past decade, the share price has been range-bound, trading largely between $10 and $20.
- High dividend yield of 6 per cent.
- Healthy balance sheet with the sale of Aecon Transportation East for $235-million.
- Potential catalysts: 1) contract wins; 2) margin expansion once the four fixed-price legacy projects are completed; and 3) future potential monetization of the company’s Bermuda concession. On the earnings call, chief financial officer David Smales said, “Selling a minority interest in the airport [Bermuda International Airport] would be something that at some point would make sense for us.”
Dividend policy
The company pays its shareholders a quarterly dividend of 18.5 cents per share, or 74 cents per share yearly, equating to a current annualized yield of 6.1 per cent.
Analysts’ recommendations
This small-cap security with a market capitalization of $753-million is well covered by the Street. The stock currently has five buy-equivalent recommendations, seven neutral recommendations, and one “underweight” call (from Gavin Thomson at ISS-EVA). The analyst at BMO is currently restricted on the stock.
The firms providing research coverage on Aecon are: ATB Capital Markets, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, iA Capital Markets, ISS-EVA, Laurentian Bank, National Bank Financial, Paradigm Capital, Raymond James, RBC Dominion Securities, Stifel Canadaand TD Securities.
Revised recommendations
Month-to-date, nine analysts have revised their expectations.
- ATB Capital Markets’ Chris Murray upgraded the stock to an “outperform” from “sector perform” and lifted his target price to $16 from $14.
- Desjardins’ Benoit Poirier upgraded the stock to a “buy” recommendation from “hold” and lifted his target price to $19 from $15.
- Canaccord Genuity’s Yuri Lynk raised his target price to $11 from $10.
- IA Capital Markets’ Naji Baydoun upgraded his recommendation to “buy” from “hold” and raised his target price by $3 to $16.
- ISS-EVA’s Gavin Thomson cut his recommendation to “underweight” from “hold.”
- Laurentian Bank’s Jonathan Lamers upgraded the stock to “buy” from “hold” and increased his target price to $17.50 from $11.50.
- RBC’s Sabahat Khan raised his target price by $1 to $12.
- Stifel’s Ian Gillies tweaked his target price to $11.50 from $11.
- TD’s Mike Tupholme bumped his target price to $12.50 from $10.
Financial forecasts
The consensus EBITDA estimates are $256-million in 2023, up from $219-million in 2022 and forecast to rise to $282-million in 2024. The Street is forecasting earnings per share of 80 cents in 2023, up from 47 cents reported in 2022 and rising to $1.06 in 2024.
Earnings forecasts for 2023 have stabilized after tumbling in mid-2022. In July 2022, the Street was forecasting EBITDA of $288-million and the earnings per share estimate was $1.20.
Valuation
The stock is commonly valued on an enterprise value-to-EBITDA multiple basis.
According to Bloomberg, the stock is trading at an EV/EBITDA multiple of 4.3 times the 2023 consensus estimate, below its five-year historical average of 5.5 times, and at an EV/EBITDA multiple of 3.9 times the 2024 consensus estimate, below its five-year historical average of 4.9 times.
The average 12-month target price is $14.13, implying the share price has over 15 per cent upside potential over the next year. Individual target prices are: $11, two at $11.50, $12, two at $12.50, $13, two at $16, $17, $17.50, and $19.
ISS-EVA does not provide a target price and the analyst at BMO is currently restricted on the stock.
Insider transaction activity
Year-to-date, there has not been any trading activity reported by insiders.
Chart watch
In 2022, the share price was under pressure, falling 46 per cent.
In 2023, this downtrend has reversed its course. The share price is up 34 per cent year-to-date and making Aecon the second best performing stock in the S&P/TSX SmallCap Industrials sector so far this year.
In terms of key resistance and support, the share price has a ceiling of resistance around $14, and after that around $18. In terms of the downside, there is strong technical support around $10, close to its 50-day moving average at $10.37.
Over the past decade, this stock has traded largely between $10 and $20, repeatedly rallying and retreating, providing patient investors with an opportunity to accumulate shares on pullbacks.
ESG Risk Rating
According to risk provider Sustainalytics, Aecon has an ESG (environmental, social and governance) risk score of 31.3 as of July 26, 2022. A score between 30 and 40 reflect a ‘high risk’ rating.
The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.
This report should not be considered an investment recommendation.
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