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.

Richelieu Hardware: Great Company in a Tough Environment

Richelieu (Ticker: RCH in Toronto) is Canada's leading distributor, importer and manufacturer of specialty hardware and complementary products - and also ranks among the top players in its specialty in North America. After looking at this website, you are probably wondering why we should consider investing in a company that is obvously exposed to the housing market. Great companies can use difficult markets as a spring board to future growth. I think that Richelieu could be one of those great companies.

Richelieu just reported its fiscal year 2008 results that were solid in light of the economic conditions. During a difficult 2008, the company managed to pay down its debt (now debt free), bought back $20 million worth of its shares representing 5% of shares outstanding, paid over $7 million in dividend (payout ratio of about 20%) and made two acquisitions. Not bad for a company that sells to the "housing market".

During its latest quarter, Richelieu saw its Canadian sales (>80% of revenues) increase by 3.5% while sales in the United States decreased by 9.35%. While I fully expect that Canadian sales could prove more difficult in 2009, Richelieu seems to be able to offset declines by making solid acquisitions and gaining market share. So Richelieu ended up making $.046 for the quarter, which was more than last year and better than expectations.

The consensus earnings for both 2009 and 2010 is $1.52. Due to the difficult end market, expectations of growth have been removed from the market. With the stock trading at $17.95, we get a P/E multiple of about 12x and a dividend yield of 1.8%. Operations generated over $40 million in cash flow in 2008 while the company only paid out about $7 million in dividends. Even if 2009 were to be more difficult than 2008, the dividend appears safe.

With its debt free balance sheet, the company should continue to make acquisitions. Hopefully, some of their competitors will get into financial trouble during the downturn, enabling Richelieu to acquire them cheaply.

At this point, I feel that 2009 could be the low point of the cycle for Richelieu and the year could provide a solid entry point into the stock. Richelieu is definitely a company that I am watching very closely.

NOTE: This is not a recommendation. I may or may not own the stock mentioned. You should do your own due diligence since I am Evil.