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What are we looking for?

Valuations for 10 Canadian-listed engineering and construction companies.

The federal government has earmarked billions of dollars in infrastructure spending over multiple years for provinces and territories, including a temporary “COVID-19 Resilience” stream. With this stimulus, and the projected recovery from the pandemic, should investors be looking at adding companies that would build this infrastructure into their portfolios?

The screen

We used StockCalc’s screener to select the 10 largest engineering and construction stocks on the TSX and Venture Exchange. We then used StockCalc’s valuation tools to calculate fundamental (or intrinsic) valuation for each stock to see whether it is undervalued or overvalued compared with its price.

Overview of the techniques used:

  • Discounted cash flow (DCF value) is a valuation technique where cash flow projections are discounted back to the present to calculate value per share;
  • A price comparables (price comps) technique values the company on the basis of ratios from selected comparable companies;
  • An adjusted book value (ABV) is calculated by multiplying book value per share by its historical price-to-book ratio.

If we have analyst coverage, we look at the consensus target price.

More about StockCalc

StockCalc is a fundamental valuation platform with tools to calculate and report on value per share for thousands of public companies listed on major North American stock exchanges. StockCalc also contains numerous tools to understand what the stocks you are investing in are worth. Globe Unlimited subscribers can subscribe to StockCalc using the promo code Globe30.

What we found

You can see in the accompanying table the percentage difference between each stock’s recent closing price and its intrinsic value. The “StockCalc Valuation” column is a weighted calculation derived from the models and analyst target data. In today’s case, our models show these firms as fairly valued to undervalued.

Companies in this industry design, construct or contract for the infrastructure we use everyday. The industry also includes companies that provide engineering consulting and architectural services to consumer and commercial clients. Investors looks at these firms for both dividend payment and capital appreciation.

Let’s look at two of these companies.

SNC-Lavalin Group Inc. is an example of valuing a company with underlying concerns – in this case, how much discount should we apply? In terms of adjusted book value, and especially on a price comparables basis, this company looks significantly undervalued, which means the market is applying a discount to this stock. (These techniques look at a company’s balance sheet as well as comparable companies to determine a valuation.) The low DCF calculation tells us cash flow and debt levels need to be looked at. This could be the reason for the lower price, especially given SNC’s revenue is projected to decrease, by low single digits on a percentage basis, for the fourth quarter ended Dec. 31.

Stantec Inc. focuses on engineering and architecture from initial planning through to decommissioning. Our models show the stock price as slightly undervalued. What’s notable is that even though the company’s annual revenue for the third quarter ended Sept. 30 has decreased by 4 per cent, its contract backlog is up 12 per cent over the same period. This very much supports rising cash flow for the company as it has decreased expenses during the pandemic, more than offsetting the year-over-year revenue decline.

Investing involves risk. StockCalc accepts no liability whatsoever for any loss or damage arising from the use of this analysis.

Select Canadian-listed engineering & construction companies 

CompanyTickerMkt. Cap. ($ Mil.)Recent Close ($)StockCalc Val. ($)Diff. (%)DCF Value ($)Price Comps ($)ABV ($)Analyst Target ($)Div. Yld. (%)1Y Rtn. (%)
WSP GlobalWSP-T13,952.8123.19127.093.2138.8156.0276.47119.271.237.9
Stantec Inc.STN-T4,786.542.7045.807.342.0652.6539.0746.001.515.7
SNC-Lavalin GroupSNC-T3,869.522.0432.5947.93.7052.8336.4932.590.4-25.7
Badger DaylightingBAD-T1,315.737.7339.775.416.5623.7136.6742.501.610.5
Aecon GroupARE-T1,002.116.7419.1614.568.9119.0218.1419.593.80.1
Bird ConstructionBDT-T431.88.149.5517.311.2213.4311.409.924.821.2
IBI GroupIBG-T263.38.449.2910.08.775.1510.449.25n/a54.9
Dirtt EnvironmentalDRT-T262.93.103.285.9-0.584.045.363.24n/a-27.7
Atlas Engin. ProductsAEP-X22.00.390.402.50.520.100.980.00n/a-2.5
Enterprise GroupE-T10.10.220.220.00.570.050.220.00n/a13.2

Source: StockCalc

Brian Donovan, CBV, is the president of StockCalc, a Canadian fintech based in Miramichi, N.B.

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