- Record backlog should support Aecon's business.
- Recent rejection of proposed takeover by CCCI provides long-term investors with an opportunity to buy Aecon shares.
- Well-supported regular dividend, with a current yield of 3.2%.
Aecon provides construction and infrastructure development services to the private and public sectors in Canada and internationally. The company has three operating segments—Industrial (62% of last-twelve-month (LTM) revenues as of the first quarter of 2018 (1Q18)), Infrastructure (35%) and Concessions (3%).
On May 23, the Canadian government blocked Chinese state-owned firm CCCI's proposed takeover of Aecon (at C$20.37/share). Following the decision, Aecon indicated that it was no longer actively pursuing a sales process, and was instead turning its focus toward executing recent project wins while continuing its CEO search.
Since the CCCI announcement, Aecon has won key contracts that have brought its backlog to C$4.6b. Including recent contract wins (C$1.2b for REM Montréal project and C$400m for Finch West Light Rail Transit project), we derive a backlog north of C$6.2b, well in excess of the previous record level of C$4.9b in 2Q16. In addition, Aecon is currently shortlisted on several big-ticket infrastructure projects worth a total of ~C$8b that are expected to be awarded across Canada in 2018 and beyond. Other infrastructure opportunities currently at the request-for-qualification/pre-launch stage represent additional catalysts, with a further ~C$20b in potential revenues. Since 2010, Aecon's share price has seen a robust correlation of 63% with its backlog. Consequently, we believe the recent disconnect between the share price and Aecon's record backlog offers an attractive entry point for long-term investors.
We also note the potential for margin expansion in the long term (current LTM EBITDA margin of 5.4% vs US contractor average of 7.0%), solid growth in recurring revenue (+12% year-over-year in 1Q18) and the attractive fundamentals that underpin additional growth opportunities in the nuclear (in particular, the Bruce Nuclear Generating Station), energy (mainly pipeline construction), telecom, gas and power distribution sectors.
As of March 31, 2018, Aecon had minimal leverage on its balance sheet (we forecast it will be debt-free by the end of 2018), which supports cash-deployment opportunities. In the short term, the company will prioritize organic growth opportunities through participation in some sophisticated, large-scale projects across its divisions (eg P3 projects). Meanwhile, despite the attractive 3.2% dividend yield, we believe the company is well-positioned to increase the dividend further.
Looking at valuation, Aecon's shares are attractive, trading at an EV/EBITDA multiple of 5.6x based on consensus estimates for 2018, well below their five-year average of 8.0x and 10-year average of 7.9x. We therefore believe Aecon remains a potential takeout candidate.