Oil Sands And Coal Will Strain Margins Yet Promise Progress

Key Takeaways

• Heavy reliance on commodities and delayed project starts create near-term revenue unpredictability and risk of underutilized assets.
  
• Labor shortages, regulatory hurdles, and rapid investment requirements may compress margins and limit the pace of growth and profitability.
  
• Heavy reliance on cyclical resource projects, labor shortages, regulatory risks, and capital demands threaten revenue stability and margins amid slow diversification and sustainability pressures.

Catalysts

Provides mining and heavy civil construction services to customers in the resource development and industrial construction sectors in Australia, Canada, and the United States.

• While ongoing infrastructure renewal and climate resiliency projects in North America suggest a substantial pipeline of earthworks and heavy civil opportunities for NACG over the next several years, the timing for major contract starts is weighted towards late 2026 and 2027, which could result in lumpy revenue growth and periods of underutilized fleet in the interim.
  
• Despite expanding project wins and renewals in Australia as well as a strategic push into civil infrastructure, NACG continues to face volatility stemming from overdependence on commodities work (particularly oil sands and coal), and abrupt operational disruptions such as labor shortages and unplanned plant shutdowns have led to elevated costs and margin contraction, which may persist if not effectively managed.
  
• While automation, advanced fleet optimization, and the company's strong safety/compliance record should allow NACG to capture premium work with large resource clients and maintain a competitive edge, the rapid pace of required investment in new technology and labor recruitment may pressure net margins and free cash flow, with recent elevated sustaining capital spend and component failures underscoring execution risk.
  
• Although the company has rapidly grown its Australian operations with a track record of high equipment utilization, there is a practical ceiling on near-term growth due to skilled trade shortages and region-specific fleet redeployment challenges, which may cap earnings before scale efficiencies can be fully realized.
  
• Even as federal stimulus and resource independence initiatives are expected to drive a secular increase in North American infrastructure spending, more stringent permitting and regulatory frameworks-combined with high ESG scrutiny-could slow project approvals and increase compliance costs, injecting uncertainty into the conversion of backlog to revenue and ultimately constraining long-term earnings growth if not proactively addressed.

North American Construction Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on North American Construction Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming North American Construction Group's revenue will grow by 3.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 2.8% today to 5.5% in 3 years time.
• The bearish analysts expect earnings to reach CA$77.7 million (and earnings per share of CA$2.37) by about August 2028, up from CA$34.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 11.3x on those 2028 earnings, down from 14.5x today. This future PE is greater than the current PE for the CA Energy Services industry at 9.3x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.59%, as per the Simply Wall St company report.

North American Construction Group Future Earnings Per Share Growth

Risks

• Overdependence on large oil sands and coal projects exposes North American Construction Group to the risk of declining long-term demand driven by decarbonization, energy transition, and sustainability pressures, which could lead to reduced future revenues and earnings volatility.
  
• Increasing labor shortages in both Canada and Australia, especially in skilled trades such as heavy equipment technicians, may cause wage inflation and operational inefficiencies, pressuring net margins and driving up costs in periods of strong growth.
  
• Heightened regulatory and ESG scrutiny, particularly around extractive and high-emission projects, can inflate compliance and reclamation costs and potentially restrict contract awards, which could squeeze margins and impede revenue growth.
  
• Sustaining and growth capital expenditures have risen sharply, with higher-than-expected component failures and maintenance needs impacting free cash flow, and the company faces a continued requirement to reinvest heavily to keep its equipment fleet competitive, which could compress net margins and limit profitability.
  
• Customer and geographic revenue concentration remains high, with a single Australian contract representing a large percentage of backlog and slow diversification into infrastructure projects, which increases the risk of revenue disruption if contract renewals falter or ramp-up in new sectors is slower than expected, threatening both revenue and earnings stability.

Valuation

• The assumed bearish price target for North American Construction Group is CA$19.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of North American Construction Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$55.0, and the most bearish reporting a price target of just CA$19.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be CA$1.4 billion, earnings will come to CA$77.7 million, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 9.6%.
  
• Given the current share price of CA$17.01, the bearish analyst price target of CA$19.0 is 10.5% 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.