Aecon poised to gain from SNC-Lavalin’s retreat from world of builders

The Toronto-based contractor reported strong second quarter results late last week, beating analyst expectations

The head of Aecon Group Inc. is voicing his faith in the construction company’s bread and butter, fixed-price contracts — which rival SNC-Lavalin Group Inc. abruptly retreated from this week in a move analysts say will work in Aecon’s favour following another high-earning quarter.

Aecon’s share price jumped more than nine per cent to $21.48 in trading July 26, while SNC-Lavalin’s closed Friday near a its 14-year low of $21.

“At Aecon, we are builders…it’s our job,” chief executive Jean-Louis Servranckx told investors on a conference call Friday.

“We are not dependent on a subcontracting industry that may overheat during some periods. We have our superintendents, we have our people, we have our workforce,” he said.

About 42 per cent of Aecon’s 2018 revenue derived from fixed-price contracts, under which companies have to eat any cost overruns. That share is set to expand, as nearly two-thirds of its backlog revenues are set to come from the so-called lump-sum, turnkey contracts.

SNC-Lavalin announced last week it is quitting the field of fixed-price contracts amid a strategic shift to its engineering roots, slashing its profit forecast for the third time this year.

Servranckx said “it’s difficult to say if it is negative or positive” for his Toronto-based firm, stating that “we have taken good note of SNC’s position.”

Analyst Frederic Bastien of Raymond James, however, says that “one’s loss is another’s gain.”

“We believe SNC-Lavalin’s decision to stop bidding on lump-sum work earlier this week has positive implications for Aecon — at least in the short term,” Bastien said in an investor note.

Until this week, Aecon-led consortiums were in direct competition with its rival for three of the five major Canadian construction bids SNC-Lavalin was shortlisted for: Vancouver’s Broadway subway extension, Edmonton’s Valley Line West LRT and Ontario’s GO Expansion Program.

“None of this guarantees Aecon will secure these complex transit jobs, but with some international firms also treading more carefully after taking significant blows in Canada, there’s suddenly a dearth of contractors that can combine multi-trades, high and low voltage power, and sophisticated control systems under one roof,” said Bastien, who predicted Aecon may well snag one or two more light-rail transit projects in the next year.

Aecon is currently partnered with SNC-Lavalin on four major projects: Montreal’s REM light-rail project, Toronto’s Eglinton Crosstown LRT and the refurbishment of the Darlington and Bruce nuclear plants in Ontario.

“SNC has decided to go along with these projects,” Servranckx said. “They are on time and on budget.”

Aecon boosted its net profit 143 per cent year over year last quarter to $20.4 million, or 31 cents per diluted share. That beat analysts’ expectations of $13.8 million or 20 cents per diluted share, according to financial markets data firm Refinitiv.

Revenue beat analyst estimates to hit $867.3 million in the quarter ended June 30, up from $754.8 million in same period a year earlier.

Reported backlog at June 30 was worth $6.76 billion, up from $6.44 billion in 2018.