����ӰԺ

A new report for investors on the 2023 prospects for a range of Canadian industries including construction states the future for the building sector looks generally positive, with healthy demand for services and backlogs in good shape.

The report by ATB Capital Markets titled Diversified Industries: 2023 Cross Sector Outlook assessed the construction and engineering sector in general and publicly traded firms in particular.

Report co-author Chris Murray, an analyst for ATB, said ATB pores over a variety of factors including backlogs, how much risk the firms have taken on, the ability to self-perform work, willingness to engage in mergers and acquisitions (M&A), geographic diversity and also leadership, including conversations with CEOs and CFOs.

The report slotted anticipated strong performers in 2023 into an Outperform list that included Bird Construction, Dexterra Group, Stantec and SNC-Lavalin. GFL Environmental, in the Waste and Environmental category, was rated as Outperform, as was Mainstreet Equity Corp. in the Real Estate category.

Aecon and WSP were rated as Sector Perform.

An Outperform (Buy) rating represents a security expected to provide a return greater than the peer group average. A Sector Perform (Hold) rating represents a security expected to provide a return in line with the peer group average.

“Exiting 2022, I think you would find that most of the folks would suggest to you that they’re seeing healthy demand levels out there,” said Murray of publicly traded construction companies. “Their backlogs are actually in pretty good shape.

“What they’re seeing right now is very healthy demand across the board for horizontal infrastructure. A lot of demand as well for environmental services, water and things like that. So certainly they expect to see growing backlogs again in 2023.”

Murray was speaking during a break from the Institutional Investor Conference held Jan. 10 to 12, the first two days in Toronto and the final day virtual. The conference was an opportunity for investment analysts to hear directly from top executives like Aecon CEO Jean-Louis Servranckx and Stantec CEO Theresa Jang.

Murray said investors wanted to know how Aecon was dealing with four “legacy” projects in which it has assumed a lot of risk — the Eglinton Crosstown LRT, Coastal GasLink, Finch West LRT and the Gordie Howe Bridge — and how it is aiming to participate in more collaborative, risk-sharing project delivery models in future.

The ATB report noted, “We see the pendulum swinging on risk associated with construction, with new awards coming in more collaborative contract forms such as progressive design build.”

“Certainly, there was a big theme in the conference that we talked about, around risk transfer. And it was quite interesting to hear the guys talk about some of these different construction models that they’re going to be moving away from,” Murray said, referring to fixed-price contracts that do not serve firms well when risks become realized.

Integrated design-build, alliance and integrated project delivery were other delivery models mentioned that share risk better, Murray said.

Murray said Servranckx referred to the pendulum swing as emphasizing the third “P” in public-private partnerships.

Examples of the new era of partnership on projects highlighted at the conference included the contract Aecon and partners have negotiated with Metrolinx on the GO electrification project and the deal Bird has signed with Canadian Nuclear Laboratories, involving a decade or so of rehabilitation work at Chalk River, Ont.

Murray said Aecon also pointed out it has expertise in sectors such as water treatment plants, where there is a standardized approach and the level of risk is “a lot more in control.”

The report said the healthy backlogs should mitigate concerns about inflation and cost overruns entering 2023. Inflation for many key inputs is beginning to moderate, ATB said, as demand behaviours normalize and supply improves, “although key material prices have not fully returned to pre-pandemic levels.”

Murray cited Jang of Stantec as saying her firm prospered during the pandemic by being able to leverage its global workforce effectively.

Murray also said Bird is highly regarded for its M&A performance in recent years. The firm’s acquisition of Stuart Olson brought Bird more western Canadian exposure, he said, and the purchase of Dagmar added to its expertise in rail infrastructure.

Major themes to watch in 2023, Murray said, include whether firms will be able to make progress addressing issues on problematic projects such as the Eglinton job; whether firms will make “tuck-in” acquisitions, smaller deals that bring either regional or technical specialties to the larger company; and more broadly, how successful firms are adding to their backlogs, and also how well they do snapping up public contracts in various sectors.

Follow the author on Twitter @DonWall_DCN