Growth from a Smart Construction Portfolio

ARE - Aecon Group Inc

Aecon Group Inc is a construction and infrastructure development company in Canada. The company provides a wide range of integrated services including project financing, design, construction, materials supply, engineering, procurement, and fabrication.

In order to better align with Aecon’s new operating management structure, its industrial and infrastructure segments were combined into a construction segment beginning 2019. Aecon now operates through a diversified construction (more than 30% of EBITDA) as well as an attractive concessions (nearly 70%) portfolio. Its construction business includes conventional industrial (22% of TTM revenues), utility (22%), nuclear power (15%) and civil infrastructure (35%); and urban transportation system (6%). Its concessions portfolio includes equity ownership in attractive projects.

ARE - Business Segments

For more than a century of existence, Aecon has become an integral part of Canada’s infrastructural success story, building hundreds of factories, roads, sewer systems, power plants, mine sites, offices, hotels, casinos, etc. in the country. The company has operations in Canada, the U.S. and internationally.

Investment Data

Revenue Growth & Market Exposure

Over the years, Aecon has built a solid, diversified and resilient business model. It has developed a large scale in its core markets and has achieved significant geographic and market diversity. The company is highly diversified across various construction sectors and enjoys a strong base of recurring revenues which further adds stability to cash flows.

Aecon has established strong industry ties and a solid reputation for quality and timely execution of projects as Canada’s leading infrastructure company. The company’s pipeline of projects includes federal and key provincial infrastructure programs and other projects diversified by sector and geographies. The company has developed a strategy of building strong alliances including joint arrangements and public-private partnerships, which resulted in approximately 40% of 2018 revenue.

Given, Aecon’s ability to provide a wide range of construction, contracting and infrastructure development services, the company has become a one-stop shop for its clients looking for integrated solutions. The company’s presence across the entire value chain from site clearing to final construction is its strong competitive advantage.

Aecon can be credited with the successful implementation of some of the most complex projects including the Bermuda International Airport, the Eglinton Crosstown LRT, the Darlington Nuclear Refurbishment in Ontario, and many more. The company is also looking at the U.S. infrastructure and construction market as a strategic opportunity for earnings stability and growth.

Given its large scale, diversification and past performance, Aecon has become a partner of choice on major projects across Canada. Significant infrastructure investment opportunities across Canada and solid bidding activity in 2019 act as strong tailwinds for the company. The trend of government investment across Canada as well as by the private sector is expected to continue.

ARE - Project Backlog

Dividends

Aecon is a Canadian Dividend Aristocrat with a history of providing sustainable dividend growth to its shareholders. The company last raised its quarterly dividend by 16% to 14.5 cents per share from 12.5 cents per share previously. Aecon has compounded its dividend growth annually at an impressive 9.6% over the last decade. The company sports an average annual yield of 3.15% and a reasonable dividend payout ratio of 50% currently.

Aecon’s rich experience across different segments and geographies allows it to participate in multi-disciplinary projects. Positive infrastructure investment trend across civil infrastructure, urban transportation systems, nuclear power, and utility by the Canadian government, as well as private players, acts as a strong tailwind for the company.

Aecon is in a good position to benefit from an attractive pipeline of public and private opportunities worth over $30 billion and a high margin long dated backlog. A strong and liquid balance sheet further supports growth. The company has set a goal to grow its adjusted EBITDA margin with a focus on the bottom line. Global expertise, solid infrastructure development and strong backlog positions Aecon to generate better EBITDA margin growth.

Competition

Aecon operates in highly competitive markets with large contractors, mid-sized as well as smaller companies. The company also faces intense competition from foreign companies trying to enter the Canadian market. Aecon competes with the likes of SNC-Lavalin, which is Canada’s largest engineering and construction company by revenue. It also competes with WSP Global, Stantec Inc, Dirtt Environmental Solutions, etc. Stantec is a top-tier global design firm with a presence in architecture, environment, community development, and energy segments. Aecon’s integrated platform provides an operational advantage when compared to its peers.

Bottom Line

Aecon has been a primary player in Canada’s infrastructure development story with a solid experience of more than 100 years and rich expertise in the construction field. The company enjoys a recurring and diversified revenue stream across various construction sectors and attractive concessions portfolio. It has a strong pipeline of public and private opportunities and good visibility from the long-dated backlog and a strong base of recurring revenues. As Canada’s premier infrastructure company, Aecon is well positioned to benefit from the growing infrastructure spends in Canada and strong bidding activity in the near future. It should continue its dividend growth streak comfortably in the low to mid double-digit pace.

With that said, construction is not for my portfolio. I look for businesses with toll booth and necessary in our lives. While construction of infrastructure is, government contracts are subject to cancellation and could be unstable. I would be more interested investing in a trash company since regulations require all individuals and businesses to manage their trash. Those businesses have continued recurring revenue.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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