An­a­lysts bullish on Ae­con de­spite sale re­jec­tion

National Post (Latest Edition) - - FINANCIAL POST - JEssE snydEr

OTTAWA • The head of Ae­con Group Inc. says the com­pany will have to pass up bil­lions worth of po­ten­tial in­ter­na­tional con­tracts af­ter Ottawa 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, Ottawa blocked the $1.5-bil­lion sale of Ae­con to China Com­mu­ni­ca­tions Con­struc­tion Co., Ltd. (CCCC), a Chi­nese sta­te­owned en­ter­prise, cit­ing na­tional se­cu­rity risks.

Ae­con’s share price was clob­bered in re­sponse to the de­ci­sion, plum­met­ing 15 per cent, back to its pre­sale 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 Ottawa’s $186.7-bil­lion 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 2 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 Ottawa 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 Ottawa’s de­ci­sion.

NORM BETTS / BLOOMBERG

John Beck, chair­man and chief ex­ec­u­tive of­fi­cer of Ae­con Group Inc., said he was dis­ap­pointed when Ottawa re­jected a CCCC takeover bid, but he re­spects the de­ci­sion.

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