Aecon Group's Steam Technologies Division Boosted on Cuban Contract Win

Raymond James analyst Frederic Bastien is bullish on Toronto-based Aecon Group (AEGXF.PK) after its Innovative Steam Technologies [IST] division won its largest single contract to date, a deal supply five generators to Sherritt Power, a division of Sherritt International Corp. (SHERF.PK), for its Energas Boca de Jarunco project in Cuba.

In a note to clients, Mr. Bastien said:

This contract not only market IST’s entry into a new international market, but also represents the single largest contract award to date for the business unit.

Design and production of the units, which will recover waste heat from the five 35 megawatt gas turbines, is already underway, with delivery expected between the second and third quarters of fiscal 2009.

He noted that this contract, combined with the C$10-million worth of orders won from StatoilHydro (STO) and Entek Electric Uretimi earlier in June, brings IST’s backlog to a record $74-million.

He said:

This further supports our view that Aecon’s industrial segment will continue to perform very well over the next few years.

The analyst added that IST is one of Aecon’s most profitable businesses.

Other factors that supports Mr. Bastien’s positive outlook on the company include: its position as a leading roadbuilder in Ontario; the turnaround in its Buildings division; the breadth and scope of its operations “unmatched by any of its Canadian publicly-traded peers; a strong balance sheet and free cash flow position.

At the current price of Aecon’s shares, under C$16 each, Mr. Bastien says the company trades at an Enterprise Value/EBITDA multiple of 5.3 times his 2008 estimates, which compares favorably with its Canadian peers. These include Bird Construction Income Fund (BIRDF.PK) (6x), Churchill Corp. [CUQ/TO](5.9x), Flint Energy Services Inc. (FESVF.PK)(7.1x), Lockerbie and Hole Inc. [LH/TO](6.8x), and Seacliff Construction Corp. [SDC/TO](4.8x).

He gives the company a C$23 target price, which implies a value of C$18 per share for the core construction unit and C$5 per share for the company’s two infrastructure concession investments.