Scarborough Subway And Darlington Nuclear Projects Will Define Future Success

Key Takeaways

• Record backlog and major project advances are expected to drive revenue growth and consistent earnings with better margin predictability.
  
• Strategic acquisitions and sector expansion into energy and international markets aim to diversify revenue streams and improve profitability.
  
• Challenges in legacy projects and completion risks could impact Aecon's profitability and long-term revenue despite a strong backlog.

Catalysts

Aecon Group Inc., together with its subsidiaries, provide construction and infrastructure development services to private and public sector clients in Canada, the United States, and internationally.

• Aecon's record backlog of $9.7 billion, which includes new significant contracts such as the Scarborough Subway Extension and nuclear refurbishment projects, is expected to drive substantial revenue growth over the next few years.
  
• The advancement of major projects like the Darlington Nuclear Project and U.S. Virgin Island Airport redevelopment using collaborative models is likely to lead to consistent earnings improvements and greater margin predictability.
  
• The expected completion of the remaining legacy fixed-price projects by Q3 2025 should lead to improved profitability and net margin stability as these high-risk projects are phased out.
  
• Strategic acquisitions, such as the acquisition of Xtreme and United Engineers, and entry into the growing U.S. utilities market are anticipated to expand capabilities and contribute to revenue growth and potential margin improvements.
  
• Aecon's focus on expanding into new sectors linked to energy, power, and international markets aims to diversify its revenue streams and provide additional growth and margin opportunities through less cyclical earnings sources.

Aecon Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aecon Group's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -2.0% today to 6.2% in 3 years time.
• Analysts expect earnings to reach CA$351.4 million (and earnings per share of CA$6.23) by about May 2028, up from CA$-91.3 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 4.9x on those 2028 earnings, up from -11.0x today. This future PE is lower than the current PE for the CA Construction industry at 38.2x.
• Analysts expect the number of shares outstanding to grow by 1.04% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.04%, as per the Simply Wall St company report.

Aecon Group Future Earnings Per Share Growth

Risks

• Aecon's adjusted EBITDA decreased significantly due to a negative gross profit of $29 million on a fixed price legacy project, which could continue to impact net margins if not resolved.
  
• The civil operations in Western Canada showed weaker gross profit, potentially affecting overall earnings if challenges persist in this segment.
  
• Lower revenues in Urban Transportation Solutions as projects near completion may lead to short-term revenue pressures until new projects ramp up.
  
• Aecon faces risks associated with the completion and claims resolution of the three remaining legacy projects, which could negatively impact future profitability.
  
• Despite a strong record backlog, the growth strategy dependent on successful project execution and contract settlements presents risks that could affect long-term revenue and margin predictability.

Valuation

• The analysts have a consensus price target of CA$21.545 for Aecon Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$30.0, and the most bearish reporting a price target of just CA$14.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$5.6 billion, earnings will come to CA$351.4 million, and it would be trading on a PE ratio of 4.9x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of CA$15.91, the analyst price target of CA$21.55 is 26.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.