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Inside the Market Aecon’s beaten-up stock after blocked takeover offers intriguing opportunity for investors

Steel girders are put in place above Jarvis Street on the Gardiner Expressway in downtown Toronto in this Nov. 15, 1963 file photo.

John Boyd/Globe and Mail

Aecon Group Inc. didn’t work as a short-term takeover target. Perhaps the stock will look better as a long-term investment.

The construction firm had seen its share price soar to a 10-year high of $20 in April, ahead of a proposed $1.5-billion takeover by the financing unit of China Communications Construction Co. Ltd. (CCCC), which is majority-owned by the Chinese government.

But on Thursday, the shares tumbled to levels seen 4½ years ago, down 15.4 per cent for the day, after the Canadian government blocked the deal on Wednesday, citing national security.

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If CCCC saw a compelling price at $20.37 a share – the proposed takeover price – investors should be intrigued now that the shares are trading significantly lower, even with another takeover deal looking unlikely, given the government’s decision.

“The fundamentals are much better than when the [CCCC] bid was first announced,” Jacob Bout, an analyst at CIBC World Markets, said in a note.

Although the proposed merger was touted as an opportunity to give Aecon access to bigger infrastructure projects globally, the Canadian company was certainly not struggling to find business before the Chinese suitors came calling.

Known for its work on the CN Tower, St. John’s Harbour, Vancouver Ferry Terminal and, ugh, Toronto’s Gardiner Expressway, Aecon’s order book remains strong.

In the first quarter, this pipeline of projects had expanded to $4.6-billion, which included a light-rail transit project in Montreal and a hydroelectric dam and generating station in British Columbia. Since then, it has secured an LRT project in Toronto, which will raise the company’s backlog to a record-high $5.5-billion in the second quarter.

Desjardins Securities analyst Benoit Poirier, in a note to investors, says he believes the shares are a buying opportunity and could return to the $20 range, a view shared by at least four other analysts since the takeover deal was quashed.

The reason: With Aecon’s backlog growing amid strong spending on transit, energy infrastructure and power-distribution projects, many analysts believe the shares are looking cheap.

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Aecon’s EV/EBITDA multiple (or enterprise value to earnings before interest, taxes, depreciation and amortization, which essentially compares a company’s takeover value relative to its earnings) was a lofty 9.2 last year when CCCC announced its takeover intentions.

The valuation retreated to 7.3 before the government issued its final decision and has since fallen even more with Thursday’s selloff. But some analysts believe that if Aecon’s EV/EBITDA multiple, based on estimates for 2019 earnings, stays in line with its peers in the construction sector, the shares should be worth considerably more.

“Although we are disappointed by the outcome, we remain bullish on Aecon based on its solid fundamentals. Consequently, we would view any share-price weakness as a nice buying opportunity for long-term investors,” Mr. Poirier said in his note.

However, any rebound in the share price won’t happen quickly. Given that 99 per cent of shareholders approved the takeover deal at a recent shareholder meeting, it is likely that current investors are dismayed by the deal’s reversal – not to mention the slump in the share price.

Now, Aecon will need to attract a new long-term mindset among investors, or perhaps a new set of investors altogether, at a time when the company is also looking for a new chief executive to replace interim John Beck.

“While we are not concerned about the company’s long-term future, given substantial backlogs, solid balance sheet and expected earnings profile, we believe the disruption and dislocation of the shareholder base coupled with uncertainty around the company’s future strategic direction, particularly with a CEO search under way is likely to weigh on share price substantially,” Chris Murray, an analyst at AltaCorp Capital, said in a note released before Thursday’s downturn.

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So expect a rough ride.

For sure, existing shareholders who had been expecting a takeover deal to go through are now writhing in pain. But investors who are willing to bet on infrastructure, rather than Chinese money, will be in a better position.

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