- 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.
- Top-tier growth company with 8–10 years of runway ahead in Canada plus potential international expansion.
- Highly cash-generative business model, with a fast payback on new store openings of approximately two years.
- EPS growth driven by same-store sales growth and 60–70 new store openings per year, with 1,170 stores currently open.
Dollarama is the leading operator of dollar stores in Canada. The company operated 1,170 corporate stores as of April 2018—over five times the number of stores as the second-largest dollar store operator, Dollar Tree. Dollarama stores (each ~10,000 square feet) are located in convenient, high-traffic areas, making it an attractive alternative to large-format retailers such as Walmart. The store format has proven successful in strip malls, power centres, urban street-front locations and shopping centres, and in both large cities and small towns. Dollarama provides customers with a consistent and rewarding shopping experience by offering a broad mix of ~4,000 year-round SKUs and ~700 active seasonal SKUs in general merchandise and consumable products at opening price points between C$0.82 (chocolate bars and confectionary) and C$4. In May 2017, Dollarama started accepting credit cards as a method of payment in addition to debit cards and cash.
Dollarama has a proven track record of profitable growth—its EBITDA and EPS grew at a compound annual growth rate of ~19% and ~26%, respectively, from fiscal year 2012 (FY12) to FY18. Strong growth is poised to continue—we expect EBITDA and EPS to grow at a compound annual growth rate of ~10% and ~14%, respectively, over the next two years.
Management believes that the Canadian dollar store industry remains underpenetrated relative to the US dollar store industry. The company is adding
60–70 stores per year and has increased its estimate of the number of Dollarama stores that the Canadian market will be able to sustain to 1,700 (from a prior estimate of 1,400 and an estimate of 900 at the time of the initial public offering in October 2009).
Dollarama has an option, exercisable in 2020, to acquire a majority equity interest in Dollar City, a dollar store operator currently in El Salvador, Guatemala and Colombia with ~120 stores. Dollar City is using the intellectual capital of Dollarama, with the stores and merchandise being very similar to one another.
The company has raised quarterly dividends every year since the first dividend was declared in FY12; it recently increased the quarterly dividend per share to C$0.040 from C$0.037 (post 3:1 stock split basis). Our target price of C$58.00 is based on 30x our forward-four quarter EPS estimate plus C$3.33 with respect to monetizing at least one international expansion opportunity within 10 years.
|Company||Ticker||Price ($)||Market cap ($m)||Ratingfootnote 1||Target price ($)||Dividend yield (%)||Total expected return (%)||Sector|
|Manulife Financial Corporation||MFC||24.84||49,262||Buy-AAR||28.00||3.5%||16%||Life Insurance|
|Alimentation Couche-Tard Inc.||ATD.B||57.00||32,241||Buy-AAR||74.00||0.6%||30%||Consumer Staples|
|Sun Life Financial Inc.||SLF||54.69||33,231||Buy-AAR||58.00||3.5%||10%||Life Insurance|
|TELUS Corporation||T||46.50||27,696||Buy-AR||52.00||4.5%||16%||Telecom, Media & Tech|
|Algonquin Power & Utilities Corp||AQN||12.69||5,972||Buy-AR||15.75||5.4%||29%||Power & Utilities|
|Uni-Select Inc.||UNS||21.70||918||Top Pick-AR||33.00||1.7%||54%||Consumer Discretionary|
|Transat A.T. Inc.||TRZ||8.05||314||Buy-AR||15.00||–||86%||Transportation & Aerospace|
- Target price change: TRZ to $15 (from $18).
- AR: Average Risk, AAR: Above-average Risk
Source: Desjardins Capital Markets, Bloomberg, FactSet