Expanding Australian And US Operations Will Broaden Business Horizons

Key Takeaways

• Diversification into Australia and infrastructure projects is expected to improve profit margins and sustain revenue growth.
  
• Strategic capital allocation focused on debt reduction and acquisitions could enhance financial leverage and boost shareholder returns.
  
• Reliance on the Canadian oil sands and Australian operations poses risks to revenue stability, profitability, and financial health amid economic, regulatory, and currency challenges.

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.

• Strong growth in Australia, along with record revenue and contract wins, positions the company for future revenue growth, particularly with diversification into the New South Wales and other resource-rich Australian states.
  
• High equipment utilization rates in Australia (over 80% and aiming for 85% in 2025) provide operational efficiency that is likely to improve net margins and profitability.
  
• Increasing backlog to $3.5 billion, with substantial new contracts such as a Canadian oil sands extension and a New South Wales copper project, indicates potential for sustained revenue and earnings growth.
  
• Expansion of infrastructure projects in the U.S. and Australia to become 25% of the business, leveraging low capital intensity, is expected to enhance profit margins and diversify earnings sources.
  
• Ongoing capital allocation plans include debt reduction and strategic acquisitions, which could improve financial leverage and support earnings per share growth through increased free cash flow and shareholder returns.

North American Construction Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming North American Construction Group's revenue will grow by 5.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.8% today to 12.9% in 3 years time.
• Analysts expect earnings to reach CA$177.8 million (and earnings per share of CA$5.17) by about April 2028, up from CA$44.1 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 9.6x on those 2028 earnings, down from 12.0x today. This future PE is greater than the current PE for the CA Energy Services industry at 7.0x.
• 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 9.68%, as per the Simply Wall St company report.

North American Construction Group Future Earnings Per Share Growth

Risks

• There is a potential risk in maintaining high fleet utilization rates, particularly in Canada, which might not reach its target if new project wins outside of the oil sands are not secured; this could impact revenue growth projections and profitability margins.
  
• Decreased activity and revenue in the Canadian oil sands, combined with uncertainties around long-term demand, pose a risk to consistent revenue streams and may lead to lower net margins.
  
• Currency fluctuations related to the Australian dollar and potential tariff impacts could affect profitability and increase costs, affecting net earnings and financial stability.
  
• High dependence on Australian operations for growth and profit could expose the company to risks related to regional economic or regulatory changes, potentially impacting the revenue stream diversity and long-term earnings stability.
  
• The significant portion of debt denominated in Australian dollars and rising interest rates could present a financial risk if currency values shift unfavorably, impacting net debt leverage and overall financial health.

Valuation

• The analysts have a consensus price target of CA$39.222 for North American Construction 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$55.0, and the most bearish reporting a price target of just CA$33.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CA$1.4 billion, earnings will come to CA$177.8 million, and it would be trading on a PE ratio of 9.6x, assuming you use a discount rate of 9.7%.
• Given the current share price of CA$19.16, the analyst price target of CA$39.22 is 51.2% 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.