Analysts bullish on Aecon despite fallout from blocked $1.5B sale
CEO promotes project backlog although he rues missed opportunities for growth
OTTAWA The head of Aecon Group Inc. says the company will have to pass up billions worth of potential international contracts after the federal government rejected its sale to a state-owned Chinese buyer, a decision that has prompted the construction firm to recalibrate its growth plans and look to restore its battered share price.
“We know of opportunities right now that we could have been chasing with that larger balance sheet and their presence,” company CEO John Beck said in an interview, declining to identify projects. “We know two large international projects right now that we could have participated in that we will not, simply because there’s only so much you can do at one time. We will be much less aggressive in our international business.”
Last month, the federal government blocked the $1.5-billion sale of Aecon to China Communications Construction Co., Ltd. (CCCC), a Chinese state-owned enterprise, citing national security risks.
Aecon’s share price was clobbered in response to the decision, plummeting 15 per cent, back to its pre-sale price of around $15 per share. That has prompted Beck to meet with analysts as part of a broader effort to re-establish confidence in Aecon’s long-term business prospects. Beck will depart once the company has found a new chief executive.
Beck, who founded the company, is now embarking on a final push to promote the company’s sizable project backlog, its healthy balance sheet and the strength of the Canadian market.
Construction firms have been buoyed by a strong Canadian economy and the gradual rollout of the $186.7-billion federal infrastructure spending program, which has provided several big-ticket projects to engineering, procurement and construction (EPC) firms.
On Thursday Aecon announced it won a $475-million contract with its joint venture partners to refurbish the Bruce nuclear power station in Ontario, following an earlier contract to restore the Darlington nuclear facility.
The company’s backlog now stands at about $6 billion, the largest in the firm’s history. Recently, it won bids to build several major projects, including Montreal’s Réseau Express Métropolitain (REM) light rail system and the Finch West LRT expansion in Toronto.
Aecon’s construction work at the $10.7 billion Site C dam in British Columbia is now ramping up, and Beck said the company is “cautiously optimistic” that it will retain its contract for the Fraser Valley section of the Trans Mountain pipeline after the Canadian government took over the project last month in an extraordinary $4.5-billion buyout.
The company had decided to pull out of a bid for the Gordie Howe bridge last month, in a move that critics said was due to national security concerns but that Beck maintains was a result of the company ’s already sizable backlog. “We thought that was the wise thing to do,” Beck said.
Several analysts believe the Aecon stock has plenty of room to grow, even as the company reboots its search to replace Beck as CEO.
“The fundamentals for the company are incredibly strong, and they’ve gotten a lot stronger over the last few months,” said Yuri Lynk, an analyst with Canaccord Genuity.
Lynk is bullish on Aecon stock, noting that the company’s share price has remained more or less flat over the past decade, despite earnings before interest, taxes, depreciation and amortization growing over the same period from about $115 million to $176 million in 2017. His target price for the Aecon is $22 per share. They closed at $15.69, up two per cent on Thursday in Toronto.
Analysts at Raymond James set a target price of $20.50 on Aecon stock after CCCC’s takeover was rejected, saying they have become “significantly more confident about its prospects as a standalone entity.”
Not all analysts are convinced. Chris Murray, an analyst with AltaCorp Capital Inc., maintained an underperform rating for the company after the federal government blocked the acquisition, setting a target price of around $13 per share, down from its previous target of $16.75.
Aecon’s share price briefly popped on the news of the CCCC takeover, but plummeted as transaction-oriented funds fled the stock after the deal was rejected. It will take some time before long-term institutional investors can fill the gap left by those funds, Murray said.
In a recent note, Murray said he was “not concerned” about the long-term future of the company given its sizable backlog and relatively strong balance sheet, but said the altered makeup of Aecon’s shareholders “is likely to weigh on share prices substantially,” particularly as the company hunts for a new chief executive officer.
The CCCC deal, first proposed in October 2017, provoked intense debate in Ottawa over whether it presented a national threat to security, and kicked off a widespread lobbying campaign by other Canadian construction firms to block it. State-backed CCCC is 63 per cent owned by the Chinese government.
Domestic companies warned that the increased financial heft would put them at an unfair disadvantage to Aecon — a premise that Beck repeatedly dismissed, arguing that Canada’s construction industry is already rife with European, U.S. and Asian conglomerates that have continuously outbid Canadian firms. He argues it is part of a larger problem that intensified in the early 2000s, when Canadian governments increased their openness to foreign companies.
“The biggest frustration I’ve had for years now is we are one of the most successful contractors in Canada, we’ve been growing for 50 years, we’re responsible citizens, and we cannot compete with all of the foreigners that are here, because they’re here with the blessing of our government,” he said.
“That’s why, in my view, Canadian companies should be allowed to beef up, to bulk up, in order to compete with these guys,” he said.
Beck said he was “disappointed” when the deal was rejected, but said he respected the federal government’s decision.