The head of Aecon Group Inc. has voiced his faith in fixed-price contracts after rival SNC-Lavalin Group Inc. signalled an abrupt retreat from the business this week in a move analysts say will work in Aecon’s favour.
Aecon’s share price jumped more than nine per cent to $21.48 in mid-afternoon trading Friday following another high-earning quarter, while SNC-Lavalin’s closed Thursday at a new 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.
Aecon mainly deploys in-house managers and tradespeople on its projects in a “self-performing” model that allows more control, in contrast to the general contracting approach taken by engineering and construction giants such as SNC-Lavalin.
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.
Analyst Chris Murray credited the Toronto-based company’s “very disciplined” bidding process and “somewhat unique” self-performance model — as well as a shift away from “social infrastructure” such as hospitals and universities — for its recent success.
“They made a conscious choice to move away from that type of work, understanding that perhaps they weren’t as effective as being able to manage it,” Murray said in a phone interview. “Things like buildings and hospitals, they’re a bit more bid-intensive.”
SNC-Lavalin announced Monday it would quit the field of fixed-price construction contracts and scale back from oil and mining amid a strategic shift to its engineering roots, slashing its profit forecast for the third time this year.
The Montreal-based company, on top of a heavier reliance on subcontracting, has expanded its reach in resource industries over the last few years, but the segment has been plagued with high costs and contract problems.
The challenges prompted interim CEO Ian Edwards to announce Monday it is “exploring all options” for its resources division, including selling the flagging oil and gas business.
“Those are tough businesses. They’re cyclical. Plus you’re typically doing that, at least with their profile, in developing countries, so you’ve go all the issues that come with that,” Murray said.
On SNC’s retreat from turnkey projects, Aecon’s CEO 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.
In 2018, the federal government blocked a proposed $1.5-billion dollar takeover of Aecon by Chinese state-owned CCCC International Holding Ltd. for reasons of national security.
Companies in this story: (TSX:ARE, TSX:SNC)
Christopher Reynolds, The Canadian Press