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Investment Ideas Canadian infrastructure projects a boost for engineering stocks

Montreal's new Champlain Bridge is just one of several major infrastructure projects in the planning stages across Canada that could help boost the fortunes of the nation's engineering and construction firms.

A consortium led by Canadian engineering giant SNC-Lavalin Group Inc. won a contract estimated to be worth $3-billion to $5-billion this week to build and manage the replacement bridge that will connect Montreal to communities on the south shore of the St. Lawrence River. Other large contracts being bid on include the Eglinton Crosstown light-rail transit in Toronto, worth around $5-billion, and the Site C clean-energy project, a dam and hydroelectric generating station on the Peace River in northeastern British Columbia, with a price tag estimated at $8.8-billion.

"These are very meaningful projects. It does move the needle dramatically," Dundee Securities analyst Maxim Sytchev said.

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Investors must be aware, however, that vying for major projects is a high-risk, high-reward business.

"You're hunting for elephants," Mr. Sytchev added. "If you don't win [the contract], you don't get paid."

Analysts are largely bullish on four Canadian engineering and construction companies aiming to take advantage of these megaprojects as well as smaller ones in Canada and the United States.

WSP Global Inc. is one stock already on a tear. It's up about 25 per cent so far this year, and analysts don't think it's done yet, with 10 calling it a buy, two a hold and only one a sell, at an average price target of $45.75.

AltaCorp Capital analyst Chris Murray said the company's acquisition of Parsons Brinckerhoff Group Inc. last year has been one of WSP's main growth drivers.

"By adding Parsons it gives them additional diversification into an area [where] they really didn't have a strong presence. Both in terms of their transportation business … but it also gives them substantially more U.S. exposure," he said.

Mr. Murray said he thinks the company will continue to perform well, especially as the United States begins investing heavily in infrastructure over the next decade. He has an "outperform" rating on the stock and a $46 price target.

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Mr. Sytchev also has a "buy" rating on the stock, with a price target of $48. He pointed to the company's strong internal growth and noted that it has less exposure to the energy industry than many of its competitors.

"It's all about having that right geographical mix … that's exactly what WSP has," Mr. Sytchev said. "It has been very strong execution on their part."

Unlike WSP, which is trading near its 52-week high, Aecon Group Inc. is trading closer to its low. That may be an opportunity for investors, as analysts are similarily upbeat about its prospects, with 12 calling it a buy, three a hold and no analysts rating it a sell. The average price target is $15.38.

Raymond James analyst Frederic Bastien said Aecon has a great shot at some of the bigger projects on the horizon this year. Aecon is shortlisted for the Eglinton Crosstown LRT, where only $1.5-billion of construction had been committed as of the end of last year, and is also vying for the Site C project.

"Their strategy really evolved in the last five years," he said. "They've teamed up with some very strong players."

Mr. Murray is also positive on the company.

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"They've got a pretty deep backlog," he said. "And actually they've got a very good track record of qualifying for [public-private partnerships]. Not only ones they've already won, but ones that are coming."

Mr. Sytchev cautioned, however, that as the company replenishes its backlog with infrastructure projects instead of higher-margin oil and gas projects, its margins will likely take a hit.

Analysts are also largely upbeat on Edmonton-based Stantec Inc., with 10 rating it as a buy, six as a hold and no one recommending selling, at an average price target of $37.15.

Mr. Bastien pointed to the company's acquisition of Montreal-based Dessau's engineering operations as a strong positive. He said it has given the largely Western Canadian company a foothold in the east, and it's now in a position to win work in Quebec.

Mr. Murray also said he expects the share price to begin to climb.

"We believe Stantec remains a best-in-class story in a consolidating market with more than adequate financial and operational capability to drive growth over the next several years," he said. The analyst added that the recent share-price slip on oil-and-gas exposure fears understates the company's growth potential and strength in other markets such as the U.S.

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Mr. Sytchev is more cautious, pointing to the company's 24-per-cent top-line exposure to the energy industry as worrisome in the current environment.

Analysts view SNC as more of an uncertainty, noting that its legal issues have not yet all been resolved. Seven analysts rate SNC as a buy, eight as a hold and one as a sell.

But Mr. Sytchev said the stock's "very cheap" valuation is an opportunity. It's trading at only 6.22 times earnings of the past 12 months. "The downside is very limited in this story and the upside is just dramatically bigger," he said.

The analyst said the company's stake in the Toronto area's Highway 407 toll expressway will likely be monetized this year for higher-than-consensus expectations, and that from there, "it's all about righting the ship."

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