Description

Bird Construction Group (TSX:BDT)

Industry Sector: Engineering and Construction

Key Investment Highlights:

Operating since 1920

Strong Balance Sheet: $109mm WC, $151mm net cash, $9.3mm LT debt

Dividends: Yield is 4.6%, and is expected to sustain

Favourable Macro Conditions: Focus on infrastructure spending by the federal government

Strong Management Team: Terrence McKibbon was hired as Chief Operating Officer in May 2017. Mr. McKibbon was previously the President and CEO of Aecon Group Inc., having 30+ years of industry experience

Current weakness in the stock price represents a good investment opportunity for long-term patient investors

Overview

Bird Construction operates as a general contractor in the Canadian construction market, operating 11 locations coast-to-coast, and serving the institutional, industrial and commercial verticals. Bird has been in operations for over 97 years, and have generated $1.59 billion in revenues for 2016.

Although the industrial, higher-margin, business is getting affected due to depressed oil prices and the stagnant resource sector, Bird generates 56% of its business from the institutional sector (ie. the Government). Governmental spending on infrastructure projects is expected to increase in the coming years, as clearly outlined by Canada’s 8-year $5–6 billion dollar annual spending commitment:

Additional Business Description:

Within the industrial sector, Bird constructs industrial buildings and performs civil construction operations including site preparation, concrete foundations, metal & modular fabrication, mechanical process work, underground piping and earthwork for clients primarily operating in the oil and gas and mining businesses.

Within the commercial sector, Bird's operations include the construction and renovation of shopping malls, big box stores, office buildings, hotels and selected high rise condominiums and apartments.

Within the institutional sector, Bird constructs hospitals, postsecondary education facilities, schools, prisons, courthouses, government buildings, retirement & senior housing, and environmental facilities that include water and wastewater treatment centres, composting facilities and biosolids treatment and management facilities.

Canada’s most attractive end-markets currently include: transit, green, and social infrastructure

Favourable Macro Conditions:

Canada’s 10-year Infrastructure bull cycle: annual investments in government buildings and E&C in Canada have doubled since 2006 versus a more modest increase of ~20% for the US  

Bird has been benefiting from this increased Governmental spending for years now, growing revenues at healthy rate year over year.

In a highly competitive industry where profit margins are squeezed to low single digits, winning contracts comes down to experience and relationships. Bird announced it has hired Terrence McKibbon as Chief Operating Officer in May 2017, bringing key industry contacts to the table, especially in industrial, energy, mining, and infrastructure space. Mr. McKibbon was previously the President and CEO of Aecon Group Inc., having 30+ years of industry experience.  

The Company exhibits a strong balance sheet, having $161mm in cash, with only $13mm in debt, and a working capital of $109mm. Although Bird has faced pressure from the market (seeing its stock price fall from $13.60 to the current $9.06), the recently halved dividend seems sustainable, providing a 4.2% dividend yield to equity investors. At the current valuation and compared to its peer group, the company represents a good risk-reward ratio for  patient investors who are willing to wait for the stock to bounce back while earning a still healthy dividend.

Valuation-wise, Bird trades in line with comps at around 12x EV/EBITDA:

Financial Analysis:

8.5% drop in revenues Y/Y to $310mm due to decreased activity in the  O&G and mining sectors.

Gross profit of 3.8%, drop from 7.7% in Q1/2016

Backlog of $1,248.5 million, at March 31, 2017

Bird ended 1Q/17 with a net cash position of $151mm, equivalent of $3.56/share of cash

Risks

Although the Company has adequate amounts of WC and Equity, the expectation of a weaker industrial market in the near term can still have negative impact on earnings in near term

Combined with the anticipated increase in P3 project activity, which requires a healthy balance sheet, led to a decision by the Company and its Board of Directors to reduce the amount of dividends paid. If the conditions continue to remain tough, a further cut in dividend, although unlikely, may not be ruled out.

Catalyst

Improving economic conditions in Western Canadian provinces, especially Alberta

Increased federal spending on infrastructure projects- Government contracts reprenset over 50% of Bird's revenue