Profiting from Infrastructure Spending: Bird Construction

With governments everywhere announcing more stimulus money aimed at infrastructure spending, a few companies should be able to benefit from this trend. Bird Construction Income Fund (BDT.un in Toronto) is one of them.

Bird is one of Canada's largest general contracting construction companies with a 20-year history of uninterrupted positive earnings, a positive net cash position of $100 million (unrestricted cash), a backlog worth over $1 billion and a distribution yield of 7.6%. This long profitable history comes from very strong risk management protocols that have enabled the company to avoid "bad" contracts.

Bird is exposed to the commercial market (malls, big box stores, ...), the industrial market (oil sands, petrochemicals, waste water, ...) and the institutional market (schools, hospitals, ...). The mix of revenues between these markets can change dramatically from one year to the next depending of the type of contracts being executed. Of note is that a few of the oil sands related contracts in their backlog have recently been delayed due to the weakness in oil prices. With current economic conditions, I do not expect the industrial and commercial markets to be the main drivers for this company but I think that the institutional market should benefit from the increase in infrastructure spending. Of particular interest is the fact that Bird has had some success in winning Public-Private-Partnerships (P3) contracts such as the Surrey Outpatient Hospital and the Alberta School Alternative Procurement project.

For the 9 months ended Sept 2008, cash available for distribution was $44 million while the amount distributed to shareholders was only $15.3 million. Interestingly, Bird pays some taxes even though it is an income trust. Once the company has to switch back to a corporation in 2011, it will start paying taxes at the full rate. The fact that it is currently paying some taxes will make for a smoother transition. From various comments by management, I do not think that we should expect much in terms of distribution increases. Management also stated that they would likely convert to a high dividend paying corporation once the income fund structure is no more.

Looking at the balance sheet, you will notice that the company has a $74 million "debt". This is a non-recourse debt for the Brampton Youth Facility project that will be extinguished by a balloon payment from the government of Ontario upon completion of the project in mid-2009. I did not include it in my net cash calculation.

At current price ($19), EV/EBITDA is at around 2x for 2008, while this is a low number, let's not forget that 2008 was a very good year. A study of similar companies shows that the trough EV/EBITDA multiple is around 2.5x and from that point of view, Bird looks like solid value. Personally, I am waiting for the company to report their fourth quarter results to hear what management has to say about the effects that project delays (mostly oil sands) will have on their financial results going forward.

NOTE: This is not a recommendation. Do your own due diligence since you should not rely on me because I am Evil.