Stuart Olson Inc.

SOX : TSX : C$9.87 BUY 
Target: C$14.00

COMPANY DESCRIPTION:
The Churchill Corporation provides commercial and
institutional building construction, industrial construction,
industrial insulation, industrial electrical and
instrumentation, and maintenance and related services
in Canada. It operates in three segments: General
Contracting, Industrial Services and Commercial Systems.
All amounts in C$ unless otherwise noted.

Infrastructure — Engineering and Construction
THESIS INTACT DESPITE SOFT GUIDE; REITERATE BUY; TARGET TO C$14.00
FROM C$14.50
Investment recommendation
We view Stuart Olson as a late cycle industrial play that, at this juncture,
offers investors unparalleled revenue visibility and meaningful cyclical
margin upside; we rate the stock a BUY. A solid balance sheet (3x
debt/LTM EBITDA) and attractive 4.9% dividend yield only further
enhance the Stuart Olson investment case. While lackluster 2014 margin
guidance has caused us to trim our estimates, it does not diminish the
company’s long-term investment case, in our view. Our target is based
on 6x 2016E EBITDA (7x 2015E previously). Stuart Olson trades at 6.3x
2015E EBITDA vs. its peers at 5.8x.
Investment highlights
Q2/14 revenue was $334 million (+20.2% y/y) and EBITDA was $10.5
million (+21.1% y/y) compared to our respective estimates of $304.7
million and EBITDA $11.5 million. The consensus revenue and EBITDA
estimates were $306.2 million and $11.6 million. Revenue beat in
SODCL but margin was weaker than expected as execution on some oil
sands jobs was challenged.

However, the Industrial segment, benefiting from the maintenance spend in the oil sands, posted EBITDA that was 12% better than expected. Management expects group EBITDA margin to be flat to slightly down from 2013 due to mix at Canem. Key to our thesis, SODCL EBITDA margin is expected to improve in 2H/2014.
The book-to-bill was 0.7:1.0 leaving backlog at $2.1 billion (+17% y/y).
With key long-term contracts with Shell and Suncor up for renewal this
year and an otherwise robust bid funnel we believe this level of backlog
can be maintained through year-end, providing visibility through 2018.

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