08. North American Construction Group Ltd. (NYSE:NOA)
Upside Potential: 54%
Average Analyst Share Price Target: $27.96
North American Construction Group Ltd. (NYSE:NOA) is a leading provider of mining and heavy construction services, particularly focused on surface mines in Canada’s oil sands region. It presents an upside potential of 54%, with analysts setting an average share price target of $27.96.
The company’s Q2 2024 performance demonstrated resilience despite challenges, particularly in its Canadian operations, which faced weather-related disruptions. However, the company maintained an impressive 26% EBITDA margin, highlighting its strong operational efficiency. Its Australian division continued to perform exceptionally well, with MacKellar posting its best results in company history, contributing significantly to overall growth. A key strength for North American Construction Group Ltd. (NYSE:NOA) is its focus on safety and operational consistency. The company has won several safety awards, underscoring its commitment to its workforce. This focus has allowed it to expand its workforce significantly since 2016, with hours worked up 340%. Furthermore, the company’s ability to manage its fleet efficiently is also notable, with 50 underutilized trucks either being reallocated to more productive markets or sold at favorable terms.
Financially, North American Construction Group Ltd. (NYSE:NOA) acquisition of MacKellar in Australia continues to pay dividends, as it contributed to a third consecutive quarter of solid performance. Gross profit margins remained strong, especially in the Australian division, which achieved over 20% in Q2. Moreover, North American Construction Group Ltd. (NYSE:NOA) strong cash flow generation and reasonable debt levels give it flexibility to fund future growth and integrate new assets. The company’s future looks promising, with a robust backlog of CAD 2.8 billion and growing opportunities in both the Canadian oil sands and Australian resource sectors. North American Construction Group Ltd. (NYSE:NOA) ability to win contracts outside its traditional markets, combined with operational efficiencies, makes it well-positioned for sustained growth and profitability in 2024 and beyond.
In its Q3 2023 investor letter, Bonhoeffer Capital Management stated the following regarding North American Construction Group Ltd. (NYSE:NOA):
“North American Construction Group Ltd. (NYSE:NOA) is a construction services firm that provides heavy civil and bulk earthmoving and project and mine site operations services in supply-constrained markets. NAC is typically the first contractor in and the last contractor out of project and mine sites. NAC has over 3,500 employees and over 900 pieces of equipment in its fleet operating at 30 sites. The fleet has a replacement value of over $2 billion.
NAC was founded in 1953 as a civil construction firm. NAC has provided earthmoving services in Canada since the 1950s, in the oil sands since the 1970s, and for resources firms since the 1980s. NAC was sold to a private equity firm in 2003 and went public in Canada in 2006. A new CEO, Martin Ferron, was appointed in 2012. His goal was to increase geographic and service offering diversification and to increase return on invested capital (RoIC). In 2012, NAC sold its lower-returning and more cyclical divisions providing pipeline construction and piling-related construction, while retaining its oil sands earthworks business. Later in the 2010s, via acquisitions and partnerships with First Nations and other aboriginal groups, NAC expanded its service offerings and its geographic footprint to other geographies such as the US and Australia. Most of NAC’s invested capital is in large dump trucks and other earthmoving equipment. If NAC could maximize fixed asset utilization, then ROIC would increase. An economies of scale in purchasing and maintenance moat was created by having a highly utilized large fixed asset fleet in remote geographic locations with harsh conditions. Since 2015, equipment utilization has increased from an average of 40%, to 61% in 2023. NAC has a target goal of 75% to 85% by 2024. Since 2012, NAC’s RoIC has increased from -12% to 12%, with a current goal of 15%; and its return on equity has increased from -10% to 22%…” (Click here to read the full text)
