Integrating MacKellar Assets And Partnering With Finning Will Improve Efficiency

Key Takeaways

• Continued integration of Australian assets and strategic partnerships are expected to boost equipment utilization, revenue, and net margins.
  
• Expansion of maintenance services and a strong bid pipeline could improve operational efficiency and drive substantial revenue and earnings growth.
  
• Increasing debt and acquisition costs are straining financial stability, while project delays and operational challenges affect revenue and cash flow.

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.

• The continued integration of MacKellar assets in Australia, now fully operational after the transfer of equipment, is expected to increase equipment utilization, thereby boosting revenue and contributing to higher earnings.
  
• Achieving early renewals and extensions of contracts with existing customers can provide long-term stability, improve revenue forecasts, and potentially enhance net margins due to cost efficiencies in ongoing operations.
  
• North American Construction Group's strategic partnership agreement with Finning, aimed at increasing fleet reliability and reducing costs, is expected to positively impact net margins by lowering maintenance expenses and improving operational efficiency.
  
• The company's focus on expanding its external maintenance business and implementing telematics aims to drive revenue growth and improve operational efficiencies, potentially leading to better net margins and earnings growth.
  
• A robust $10 billion bid pipeline, especially with the oil sands and diversified resources in Canada and Australia, offers substantial revenue growth opportunities, which can positively impact future earnings and improve shareholder value.

North American Construction Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming North American Construction Group's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.8% today to 10.4% in 3 years time.
• Analysts expect earnings to reach CA$140.1 million (and earnings per share of CA$3.97) by about March 2028, up from CA$56.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.0x on those 2028 earnings, down from 11.5x today. This future PE is greater than the current PE for the CA Energy Services industry at 8.4x.
• Analysts expect the number of shares outstanding to grow by 0.37% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 10.95%, as per the Simply Wall St company report.

North American Construction Group Future Earnings Per Share Growth

Risks

• Oil sands revenue was down compared to last year, and there are uncertainties due to changes in scope and contract timings, which could impact future revenue stability and consistency.
  
• Higher acquisition-related interest expenses in Q3 reduced earnings per share, which could indicate financial strain from acquisitions affecting net margins.
  
• Net debt levels increased to $883 million, partly due to exchange rate fluctuations and asset purchases, raising concerns about leverage and its impact on financial stability.
  
• The Canadian fleet utilization target has been pushed off to next year, potentially impacting the expected revenue and operational efficiency in the short term.
  
• The financial structuring of joint venture projects like Fargo-Moorhead could delay free cash flow impact from distributions, impacting immediate liquidity and cash flow availability.

Valuation

• The analysts have a consensus price target of CA$38.125 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$45.0, 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$1.3 billion, earnings will come to CA$140.1 million, and it would be trading on a PE ratio of 10.0x, assuming you use a discount rate of 11.0%.
• Given the current share price of CA$24.3, the analyst price target of CA$38.12 is 36.3% 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.