March 14, Aecon Group Inc. Deep dive HIGHLIGHTS

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1 ARE (T) $16.81 Stock Rating: Outperform (Unchanged) Target: $19.00 (Unchanged) Risk Rating: Above Average (Unchanged) Est. Total Return 16% Stock Data: 52-w eek High-Low (Canada) $ $ w eek High-Low (U.S.) NA Bloomberg/Reuters: Canada ARE CN / ARE - T Bloomberg/Reuters: U.S. NA (Year-End Dec 31) 2016E 2017E 2018E Revenue (mln) $3,213 $3,147 $3,565 EBITDA (mln) $158 $163 $184 EPS (FD) $0.69 $0.95 $1.26 FCPS $0.46 $2.44 $1.98 Valuation EV/EBITDA 7.0x 6.8x 6.0x P/E - Adjusted 24.4x 17.7x 13.3x P/FCFPS 35.5x 6.9x 8.5x * Inclusive of IST and Quiport Financial Data (as at March 31, 2016): Shares outstanding - Basic / FD (mln) 57.5 / 57.4 Market Capitalization (mln) $964.2 Enterprise Value (mln) 1,049.9 Cash (mln) $231.9 Debt (mln) - incl.converts $310.2 Net Cash (Debt) ($78.4) BVPS / Price/Book $13.1 / 1.3x 2017E ROE 8.2% Dividend yield 2.7% Industry Rating: Overweight (NBF Economics & Strategy Group) Company Profile: Aecon is a Canada-centric construction and infrastructure development company serving private and public sector clients (split roughly 50/50 between the two). March 14, 2017 Aecon Group Inc. Deep dive The NBF Daily Bulletin Engineering & Construction Time to go for a site visit in Bermuda airport opportunity is real and material HIGHLIGHTS In the report we provide a deep dive on the Bermuda airport, a relatively imminent project-driven catalyst for Aecon shares. For context, the airport redevelopment has been contemplated for a number of years; with two positive parliamentary votes behind us and Aecon management on Q4/16 conference call suggesting that some construction revenue is now included in the company s top-line guidance, it is an opportune time to examine the cash flow profile of this asset. According to our math (and predicated on Bermuda government documents), we believe the concession (when the financial closing takes place, sometime in H1/17E) would add $1.43 to Aecon s NAV/share, representing 7.5% upside to our and consensus numbers. Our methodology / key inputs. Just like with the Quito airport in Ecuador, the contemplated contract structure is a public-private partnership. Of note, it would be the Canadian Commercial Corporation (CCC), a Crown agency of the Canadian government, that will have signed a contract with the government of Bermuda. CCC, in turn, will subcontract 100% of the construction work to Aecon. According to the government documents, Aecon s construction revenue opportunity to redevelop the existing airport is US$302 mln (9.3% of current $4.2 bln backlog, built out over roughly 3.5 years); post construction, Aecon would manage the concession for a 30-year period. The project would require US$65 mln in equity (likely spread out over several years as with Cross Israel Highway and Quito) and US$275 mln in project (read non-recourse to ARE) debt. Anticipated IRR on the project is 15.5% with downside protection via a Minimum Revenue Guarantee (function of lacklustre traffic at the moment) and some upside sharing if the asset performs better than expected. Overall, we view the Bermuda airport opportunity as very attractive and undiscounted by the market. We rate ARE shares Outperform, $19.00 price target. Stock Performance Daily ARE.TO (TOR) Line, ARE.TO, Trade Price(Last), , , , (-0.71%), SMA, ARE.TO, Trade Price(Last), 200, , Price CAD Maxim Sytchev, MSc - (416) maxim.sytchev@nbc.ca Adam Staszewski (416) adam.staszewski@nbc.ca Auto Vol, ARE.TO, Trade Price, , 291, Volume 2M 1M 291, Auto Q Q Q Q Source: Reuters

2 Time for a Bermuda site visit material asset redevelopment opportunity for Aecon on the immediate horizon With Aecon suggesting that some construction revenue from the Bermuda airport (L.F. Wade) will be a part of the 2017E guide of flattish revenue, the signalling suggests that the company must be quite confident in securing the concession. As a result, now is an opportune time to provide a quick summary of numerous public documents available on the asset. We also wanted to highlight some caveats. Bermuda airport description of existing state of affairs At the moment, the airport receives around 800,000 visitors annually (as a reference to a previous airport project that Aecon undertook in Ecuador, that asset handled more than 6 mln passengers / annum). Of note, in Quito s case Aecon s ownership in the construction / concession was 45% while in Bermuda it will have a 100% stake. The airport is served by seven airlines - Air Canada, American Airlines, British Airways, United, Delta Airlines, JetBlue and WestJet. The airport has the ability to receive jets as large as A380. The local authorities view the existing airport structure as limiting in terms of capacity and experience (the roof leaks for example when it rains; dwell time for passengers is high during peak hours). The push to upgrade the structure has gathered momentum post two positive votes (lower and upper chamber of parliament) having supported the redevelopment over the last several months. Critically, L.F. Wade is the only airport on the island. Procurement process a sole sourced deal as public-private partnership The business case around the airport development is extensive. Many options have been considered such as the government raising capital itself / renovating the airport in piecemeal fashion / attracting a specialist airport operator to maximize efficiencies / concession revenue, etc. The preferred (i.e., least negative NPV to Bermuda) is a public-private partnership (PPP) structure whereby an entity (in this case Aecon) will act as constructor / operator for a period of 30 years. The anticipated contract is also of similar structure to that of Ecuador, whereby it is the Canadian Commercial Corporation (CCC), a Crown agency of the Canadian government, which will have signed a contract with the government of Bermuda. CCC, in turn, will subcontract 100% of the construction work to Aecon. Please note that this potential contract has been sole sourced by the Bermudian government as the risk of running the process could have resulted in failure to find a redevelopment partner due to the relatively small (in international scale) capital commitment as a construction / concession opportunity; the government did not want to face such a possibility that would have still saddled it with maintaining an increasingly costly / inefficient airport structure. Piecing together the numbers from the entrustment report published in late 2016 by the government of Bermuda (ministry of Finance) 15.5% IRR and US$65 mln equity injection required; we estimate the airport would add $1.43/ARE share when the contract is signed As part of the contract negotiation process Aecon shared its financial model with the local authorities. Figure 1 presents the model s inputs; the most important data points from an Aecon investor s perspective are the following: 15.5% (mid-point) expected ROI, US$302 mln capital costs for the airport construction, project debt duration (25 years), interest on the debt (7%) and an equity injection of US$65 mln. As was the case with the Cross Israel Highway and Quito, we should expect Aecon to use its expected cash flow from construction-related activities toward financing the company s equity investment in the concession, with the actual injection of equity coming in at the later stage of the construction process, roughly three to four years in. Given the summary figures, the reader would be hard pressed to reconstruct an estimated DCF that Aecon is running internally.

3 In order to approximate the likely cash flow model, we rely on the government s summary NPV (found here, page 56 exact representation in shown in Figure 2) that would lead to Bermuda build/design/finance the airport on its own but outsource the operations & maintenance (O&M) part to a specialist firm. According to the government documents, the rationale for base growth scenario is that the third-party operator would change the commercial, operational or management capabilities of the airport; therefore, a more robust increase in traffic levels is assumed. Note that in this case, we at least have an approximation of cash flow lift of the redeveloped airport vs. the status quo. Stripping out the benefit from the incremental hotel tax proceeds, project borrowing costs, incremental costs on sovereign debt, internalizing the O&M fees and adding Aecon s equity injection results in a rough approximation of how Aecon is likely to model the concession (Figure 3). Please note that the US$84 mln in summary output in Figure 1 is equal to 3.5 years worth of cash flows from the existing airport structure that is still expected to produce improving results due to stronger operational focus (i.e., summation of 2017E- partly 2020E in Figure 3). Using these assumptions we arrive to a total NPV/ARE share of $1.43 for the 30-year airport concession. FIGURE 1: Aecon summary output of sources / uses of funds for the Bermuda airport Project Co Assumptions for sources and uses of funds Sources: Uses: Project Debt 275 Airport Capital Costs* 302 AIF Reserve 6 Pre-Funding of reserve accounts 31 Equity 65 Maintenance Capex Account Funding 10 Cash Flow from Operations 84 Debt Service Account Funding 62 Other Development Costs 25 Total Sources 430 Total Uses 430 *This figure represents capex of $256m incl inflation, contingincies, and builders insurance Project Co - Select Key Assumptions Annual Inflation 2% Project Debt Term (years) 25 PAX Traffic Growth ( ) CAGR 0.70% Project Debt Interest Rate 7% Airport Infrastructure Charge (departing PAX) $30 Project Debt Credit Rating A- Source: NBF, Bermuda Ministry of Finance FIGURE 2: Bermuda airport design / build fee for service option as a valuation reference for Aecon s investment Design / Build - Fee for Service Option Cash Inflows Airport Operating Cash Flow Incr. Hotel Accomodation Tax Net Cash Inflows Cash Outflows O&M Management Fee Project Borrowing Costs Incr. Interest Costs on Sovereign Debt Maintenance Capital Costs Net Cash Outflows Net Cash Flows NPV Source: NBF, Bermuda Ministry of Finance

4 FIGURE 3: Bermuda airport modified free cash flow to equity relying on summary output tables from Aecon and Bermuda s design/build outsource operations & maintenance math Free Cash Flow to Equity Analysis Operating cash flow Net Cash Inflows CAPEX Free Cash Flow Change in net debt position Free Cash Flow to Equity Present Value of Cash Flows NPV ($USD) Equity injection FCFE inclusive of equity Present Value of Cash Flows NPV inclusive of equity injection ($USD) 79.4 NPV inclusive of equity injection ($CAD) ARE Shares Outstanding 72.3 NPV / Per Diluted Share 1.43 Source: NBF, Bermuda Ministry of Finance One potential caveat long-term traffic trend discussion Given the above-presented data points, the concession is materially accretive to Aecon s NAV. There is one caveat, however, as according to Bermuda Tourism, the island has faced declining air traffic for the past 20 years, notwithstanding a 17% leisure air travel passenger increase in 2016 (Figure 4; of note cruise ship traffic has grown steadily over the same time period). When looking at origin of visiting public by air (Figure 5), 75% comes from the United States, 10% from Canada and 9% from the UK. Vacation / business split is almost 4 to 1 and it is the latter category that has been stagnant/declining for a number of years. U.S. visitors by air category has grown at 2.2%/annum clip since 2013 while Canadian visitors have declined by 4.9% over the same time frame (currency certainly is not helping). The big question is whether the concession will help reverse a multiyear decline traffic pattern? Please note that in government / Aecon s documents, the new airport is expected to see a 0.7%/annum traffic growth over the concession s duration. In order to have rated debt (which it will), the traffic projections must come from a specialist firm and subsequently agreed on by the rating agencies. Of note, there is also a Minimum Revenue Guarantee (MRG) which provides some downside protection to debt holders specifically related to air traffic levels. Attracting additional airlines to the island, developing non air traffic-related revenue at the airport and obtaining an ICAO Category 1 airport status (whereby Bermuda will be able to assume both responsibility for and control of its airspace, which will result in additional revenues from tariffs paid by aircraft that utilize its airspace ) are all levers to help reverse a negative traffic trend.

5 FIGURE 4: Bermuda air vs. cruise ship arrivals Total Visitor Arrivals Annual data, thousands 600 Air Cruise Yacht Source: NBF, Bermuda Tourism 245 FIGURE 5: Bermuda by-geography visitor composition Total Air Visitors by Country of Origin YOY# YOY% United States 171, , , ,896 25, % Canada 27,607 29,162 24,986 23,744-1, % UK 23,568 22,179 22,511 21, % Europe 5,155 6,172 6,946 7, % Other 8,796 7,485 8,213 8, % Total 236, , , ,491 24, % Source: NBF, Bermuda Tourism Valuation and recommendation staying very positive Q4/16 results and in-line 2017 guidance assuaged market s fears that there was potentially a second shoe dropping post the management change. With consensus estimates finally representing economic reality, the focus this year is obviously on execution of existing backlog and adding new contracts. Given the procurement cycle of many large-scale (especially transit) projects, we feel very comfortable with the company s positioning / ability to win its fair market share. The Bermuda airport is a material catalyst for the shares and the market is not discounting the contract yet. While we ll wait to move up our NAV target once the financial close takes place, we view the probability of contract signing as 90%+ (and H1/17E event). At 6.8x 2017E EV/EBITDA Aecon is trading at a slight premium to peers (6.4x); we believe the positive spread is more than justified given the company s end-market exposure (transit, nuclear, midstream, oil sands mining) and visible contract replenishment catalysts. We reiterate our Outperform rating on Aecon shares along with the $19.00 price target.

6 FIGURE 6: Aecon - NAV EV/EBITDA multiple EBITDA Target ($000's, unless otherwise noted) 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2018E EBITDA 5.5x $144,000 $144,200 $121,000 $142,600 $158,300 $162,810 $184,191 $1,013,049 Minus: Net debt at period-end (inclusive of convertible debentures) $74,862 Equity value $1,087,911 Shares outstanding 57,362 Net asset value $18.97 Current share price $16.81 Potential appreciation - all-inclusive 15.6% *2011A-2015E represent Core Construction EBITDA; 2016E-2017E are Consolidated EBITDA Source: NBF FIGURE 7: E&C Comps Local Target Dividend Total % Off 52- Market EPS EPS P/E EBITDA ($mm) EV/EBITDA Ticker Rating Price Price Annual Yield Return w k High Cap (mm) 2016E 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E Canadian comps SNC-Lavalin Group Inc. (*) SNC.TO OP $53.33 $67.00 $ % 28% -9% $8,016 $1.70 $2.85 $ x 9.5x $730.9 $ x 3.4x Aecon Group Inc. ARE.TO OP % 16% -11% x 13.3x x 6.0x Stuart Olson Inc SOX.TO UP % -13% -15% x 12.8x x 5.5x Stantec Inc STN.TO OP % 21% -5% 3, x 12.9x x 8.3x IBI Group Inc IBG.TO OP % 32% -10% x 8.9x x 7.4x WSP Global Inc. WSP.TO OP % 11% -2% 4, x 15.6x x 8.3x Bird Construction Inc BDT.TO OP % 41% -33% x 14.6x x 4.2x North American Energy Partners Inc NOA.TO R R R R R R R R R R R R R R R R R Petrow est Corp PRW.TO SP NM NM 0% -61% x 6.4x x 3.4x Median 2.7% 18% -11% 17.7x 12.9x 7.0x 5.7x U.S. comps Fluor Corp FLR NR NA % NA 15% 7, x 20.8x x 7.3x AECOM ACM NR NA % NA 11% 5, x 13.9x x 9.2x Jacobs Engineering Group Inc JEC NR NA % NA 10% 6, x 20.0x x 9.3x KBR Inc KBR NR NA % NA -1% 2, x 12.6x x 6.5x Tutor Perini Corp TPC NR NA % NA 16% 1, x 14.0x x 6.1x Tetra Tech Inc TTEK.O NR NA % NA 11% 2, x 19.5x x 10.1x Chicago Bridge & Iron Company NV CBI NR NA % NA 0% 3, x 8.0x x 5.7x Median 0.7% 11% 16.6x 14.0x 8.2x 7.3x International comps WorleyParsons Ltd WOR.AX NR NA % NA -4% 2, x 26.9x x 9.5x CIMIC Group Ltd CIM.AX NR NA % NA -9% 11, x 27.0x 1, , x 8.6x Amec Foster Wheeler PLC AMFW.L NR 5.36 NA % NA -15% 2, x 10.7x x 10.1x Tecnicas Reunidas SA TRE.MC NR NA % NA -8% 2, x 13.9x x 7.3x Acciona SA ANA.MC NR NA % NA -5% 4, x 14.5x 1, , x 7.4x Saipem SpA SPMI.MI NR 0.40 NA % NA -31% 4, x 17.3x 1, , x 5.8x Petrofac Ltd PFC.L NR 9.06 NA % NA -7% 3, x 9.9x x 6.0x Balfour Beatty PLC BALF.L NR 2.80 NA % NA -6% 1, x 11.9x x 9.5x Arcadis NV ARDS.AS NR NA % NA -22% 1, x 9.4x x 7.3x Median 3.0% -8% 16.2x 13.9x 7.9x 7.4x (*) Trading multiples are adjusted for concession investments, EPS and EBITDA are consolidated numbers. Source: NBF, Bloomberg, company reports; UP = Underperform; SP = Sector Perform; OP = Outperform

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8 NBF quarterly ratings summary and the total ratings by month can be found on our website under Research and Analysis/Equities/About NBF Research/Quarterly Ratings Summary (link attached) The NBF Research Dissemination Policy is available on our website under Legal/Research Policy (link attached) Click on the following link to see the company specific disclosures Click on the following link to see National Bank Financial Markets Statement of Policies If a company specific disclosure is not found herein for a listed company, NBF at this time does not provide research coverage or stock rating for the company in question. ADDITIONAL COMPANY RELATED DISCLOSURES AC 6,7 ARE 6,7 BDT FTT IBG 2,3,4,5,7 NOA 2,3,4,5,7 PRW SNC 6,7,10 SOX 6,7,10 STN 6,7 TIH WSP 6,7,10 WJA 6,7 LEGEND FOR COMPANY RELATED DISCLOSURES: 2 National Bank Financial Inc. has acted as an underwriter with respect to this issuer within the past 12 months. 3 National Bank Financial Inc. has provided investment banking services for this issuer within the past 12 months. 4 National Bank Financial Inc. or an affiliate has managed or co-managed a public offering of securities with respect to this issuer within the past 12 months. 5 National Bank Financial Inc. or an affiliate has received compensation for investment banking services from this issuer within the past 12 months. 6 National Bank Financial Inc. or an affiliate has a non-investment banking services related relationship during the past 12 months. 7 The issuer is a client, or was a client, of National Bank Financial Inc. or an affiliate within the past 12 months. 8 National Bank Financial Inc. or its affiliates expects to receive or intends to seek compensation for investment banking services from this issuer in the next 3 months. 9 As of the end of the month immediately preceding the date of publication of this research report (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), National Bank Financial Inc. or an affiliate beneficially own 1% or more of any class of common equity securities of this issuer. 10 National Bank Financial Inc. makes a market in the securities of this issuer, at the time of this report publication. 11 A partner, director, officer or research analyst involved in the preparation of this report has, during the preceding 12 months provided services to this issuer for remuneration other than normal course investment advisory or trade execution services. 12 A research analyst, associate or any other person (or a member of their household) directly involved in preparing this report has a financial interest in the securities of this issuer. 13 A partner, director, officer, employee or agent of National Bank Financial Inc., is an officer, director, employee of, or serves in any advisory capacity to the issuer. 14 A member of the Board of Directors of National Bank Financial Inc. is also a member of the Board of Directors or is an officer of this issuer. 15 A redacted draft version of this report has been shown to the issuer for fact checking purposes and changes may have been made to the report before publication.