04. North American Construction Group Ltd. (NYSE:NOA)
Upside Potential: 50%
Forward Price to Earnings (P/E) Ratio: 6.07
Number of Hedge Fund Holders: 11
North American Construction Group Ltd. (NYSE:NOA) is a prominent mining and heavy civil construction services provider, operating across Canada, the United States, and Australia. Its diversified operations encompass mine management, heavy equipment rentals, and full-service mine support, making it a valuable inclusion in any list of Canadian stocks. The company’s resilience and operational efficiency along with a forward P/E ratio of 6.07 as of October 8 position it as an undervalued stock with high potential for growth.
During its Q2 2024 earnings call, North American Construction Group Ltd. (NYSE:NOA) showcased strong financial and operational performance despite challenges such as weather disruptions and fleet mobilization in Canada. The company’s adjusted earnings per share (EPS) stood at CAD 0.78, identical to the previous quarter but significantly higher than the same period last year. This consistent growth highlights the company’s ability to navigate industry headwinds while delivering robust profitability. North American Construction Group Ltd. achieved a record EBITDA of CAD 87 million, reflecting a 26% EBITDA margin driven by strong results from its Australian operations. The recent MacKellar acquisition significantly contributed to this performance, as MacKellar posted an impressive 82% equipment utilization in the quarter.
The company’s Canadian operations experienced temporary setbacks due to wildfires and abnormal rainfall, impacting fleet utilization. However, management has taken proactive steps to mitigate these issues by reallocating idle equipment to high-demand regions in Australia. With utilization targets in Canada expected to recover by early 2025, the company is well-positioned for long-term profitability. Furthermore, the company’s Fargo-Moorhead flood diversion project achieved key milestones and remains on track, adding stability to its revenue streams.
From a balance sheet perspective, North American Construction Group Ltd. (NYSE:NOA) ended Q2 with net debt levels of CAD 833 million, resulting in a manageable leverage ratio of 2.2x. The company’s free cash flow generation is expected to improve in the second half of 2024, driven by better utilization rates and strategic debt management. The company’s focus on reducing debt and improving cash flows aligns with its strategy to enhance shareholder value.
Given its operational excellence, strategic growth initiatives, and strong financial metrics, North American Construction Group Ltd. (NYSE:NOA) is a compelling addition to the list of most undervalued Canadian stocks. Its well-managed operations and expanding presence in the Australian market make it a stock with significant upside potential.
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)
