Aecom Working to Drive Growth, but Market Headwinds Continue to Limit Visibility in Near Term

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By Hanson So on May 28, 2014 Technology & Software

AECOM’s analyst meeting and Los Angeles International Airport (LAX) project tour highlighted the company’s ongoing effort to enhance growth by offering clients an integrated service with the ultimate goal of being able to design, build, finance, and operate major projects. While bundling services to provide a more integrated offering increasingly helps the company to win major infrastructure and building programs, the combination of longer-term projects in backlog and global macroeconomic uncertainties has slowed backlog burn and pressured organic revenue growth.

AECOM was somewhat encouraged with flat net service revenue (on constant currency) in its professional technical services (PTS) business in the fiscal second quarter and is hopeful that organic revenue growth should improve (with some visibility due to project schedules) in fiscal 2015, but in the near term ongoing weakness in Australia as well as in the Americas design business are likely to continue pressuring growth.

From a profitability perspective, the company continues to improve its cost structure and is confident in its 12% EBITDA margin target (9.4% in fiscal 2013), with the caveat that making material progress toward that level will require a sustainable improvement in revenue growth. Overall, AECOM is well positioned to benefit from global infrastructure investment and we are encouraged by the company’s steps to improve its market position, cost structure and cash generation, but we view shares as range-bound in the low $30s until there is better visibility into improving revenue growth and profitability.

As evidenced by improving PTS backlog growth over the last several quarters, AECOM is making progress with some of its efforts to improve backlog growth. While management has been positioning the company as more of a full-service construction management firm (rather than just an engineering and design firm) since the acquisition of Tishman in 2010, we get the sense that it is increasingly gaining traction with customers to leverage its full suite of project delivery capabilities (it still does not self-perform construction), particularly in non-building markets (infrastructure, energy, industrial, etc.) and in international markets.

Additionally, we believe AECOM is increasingly pursuing opportunities through AECOM Capital, which helps to fund projects, typically through a public-private partnership (P3) model, and ultimately provides the company with better visibility into growth (funding is often a key factor in delaying projects for AECOM). Nonetheless, timing of PTS revenue growth remains uncertain in the near term, despite impressive backlog growth (up 17% year-to-date). Higher backlog is encouraging and expected schedules on large projects give management some optimism related to an improvement in revenue growth in the not-too-distant future, but schedule delays are always a risk and ongoing weakness in Australia and the Americas design business could continue to weigh on growth as well.