AECOM (ACM: NYSE) hosted a conference call this afternoon post the release of its FQ1/20 results; we were especially interested in any commentary to potential M&A (spoiler alert… none) and general trends that pertain to U.S., UK and AUS momentum. As expected, AECOM management made no references to WSP’s potential overture. Nevertheless, we wanted to provide several highlights from the former’s quarter. Please note that company’s readthroughs are valuable for the likes of WSP, Stantec and SNC-Lavalin as these companies have 41% (U.S. & Latin America) / 57% / 17% top line exposure to the U.S., respectively. We would also say that ACM’s results echo those of Tetra Tech (TTEK: NASDAQ, Not Rated). In terms of the actual financials, ACM results were in line (note that Bloomberg consensus was not accounting for government services divestiture in its numbers, making the comps challenging on apples-to-apples basis). In terms of factoids, EBITDA margin has jumped 230 bps (hence, adjusted EBITDA is up 27% y/y in the quarter), mostly driven by North American performance. All other financial metrics have been reiterated for F2020.

AECOM and Tetra Tech both reported record backlog with particular strength in the U.S.; AECOM posted a 2% increase to US$36.5 bln (27% jump in contracted backlog in Americas) while Tetra Tech reported a 13% increase to a record US$3.17 bln. Both companies also reported tailwinds in the Water, Environment and Transportation verticals for the region. Tetra Tech grew U.S. Federal 12% y/y (driven by Water and Environment, guiding for 5 – 10% growth for the year), U.S. Commercial +5% (driven by U.S. Renewable Energy, guiding 3 - 8%) and International +25% (driven by the UK Environment vertical, guiding 7 – 12% growth). AECOM reported similarly strong numbers, also suggesting that its addressable pipeline of opportunities was up 10% y/y. Across the board, ACM remains positive on the UK as post-Brexit infrastructure spending is expected to climb (the new UK government indicated support for an additional £100 bln investment in infrastructure in the first budget) and in the U.S. (five states hiked gas tax impositions). Australia remains a robust market.

Any hints on M&A? On the call, U.S. analysts tried to probe around timing of capital deployment (specifically share buyback program) and potential announcement of CEO succession. Our sense is that it’s status quo until the end of March 2020 (share buybacks appear to be an FH2/20 event for ACM).

Full construction exit complicated by dearth of interest. ACM hopes to fully exit self-perform construction by year-end (hence, why the ops are classified as discontinued). In terms of potential proceeds, management reiterated its view that the interest in the construction-only assets remains lukewarm; as a result, even though ACM assets are profitable, getting the desired price appears to be somewhat challenged.

Bottom line – U.S. and AUS are strong markets for international peers; UK and Hong Kong are expected to rebound in H2/20E. Despite the coronavirus-afflicted weakness that we are seeing across the commodity complex (oil and copper are really feeling the reset of demand expectations), infrastructure, water and environmental services verticals continue to power higher as the long-term trends around urbanization (globally), access to clean water and now resilience, are all very much intact. On the back of decade-long improvements in states’ coffers (recall that the bulk of U.S. infra spending takes place at a local level), ability to spend on infra is improving. Infrastructure also remains one of the very few key topics that have bi-partisan support in the U.S.; other geographies such as Canada, the UK (post Brexit), AUS and Nordics remain infra-friendly. As a result, we have seen multiple re-rating across the board (see an in-depth note on the subject Here). We believe this dynamic is sustainable for the foreseeable future.

NBF does not currently provide coverage, a recommendation or opinion on AECOM. The information in this Research Flash is a compilation of publicly available information and is not to be construed otherwise.