A tad overpriced, and wonky financials due to conversion to/from an income trust, and changes to IFRS. Revisit in 2013.
Overview of the Business
Bird Construction (“Bird” or “the firm”) is involved in general construction services in Canada, nation-wide, with a focus on St. John’s, Halifax, Saint John, Wabush, Montreal, Toronto, Winnipeg, Calgary, Edmonton, and Vancouver. The bulk of the work performed by the firm is carried out on behalf of the firm by sub-contractors, and Bird mitigates the risks of working with subcontractors through a number of tools and processes:
- Paper (e.g. bonds, notes, obligations) are facilitated through one of the major Canadian banks
- Depending on the magnitude of the work, work performed by subcontractors requires promissory notes or similar vehicles to guaranty the work. Bird also closely monitors the performance of subcontractors to ensure that the work is being completed in an accurate and timely manner
While the net income for a given period is a fair indicator of the work that Bird has performed, being a construction contracting company, they have a significant number of contracts which secure future work, and future cash flow. Going through the financial statements, this work is referred to as “backlog”, and serves as a decent proxy for forward looking revenue (but not necessarily net income).
Bird is a relatively simple business to understand: they book deals (contracts) for work, farm out the work to subcontractors, and keep any payment after the subcontractors have been paid off. Bird focuses on the industrial, commercial, and institutional market sectors, and as per their corporate strategy, outsources any design work that they cannot accomplish to a degree that they feel would best benefit the customer. This is reassuring in a firm since it demonstrates their ability to focus on their core competencies, while still leveraging outsourcing relationships to have other projects designed on their behalf. At the end of the day, the actual construction is farmed out to subcontractors, so the design of the work is agnostic to the work actually being performed.
All discussion relates to the period of 2002-2011.
|Strong financial condition||Current Ratio||1.30||1.50||NO|
|Earnings Stability||Number of most recent years of positive EPS||10.00||3.00||YES|
|Earnings Stability||Number of consecutive years of negative EPS||0||1||YES|
|Dividend Growth||Compound Annual Dividend Growth||20.77%||2.00%||YES|
|Share Price Growth||Compound Annual Share Price Growth||14.51%||3.00%||YES|
|Moderate P/E Ratio||P/E||16.01||15.00||NO|
|Moderate P/BV Ratio||P/BV||2.92||1.50|
|Moderate P/E×P/BV Ratio||P/E × P/BV||46.71||22.50|
The share price of Bird has had compound year over year growth of 14.5%, which represents a good return on capital over the period. There was a significant drop in 2006, which occurred around February after Bird converted from a corporation to an income trust. This income trust structure stayed in place until 2011, when the firm changed back to a corporation on January 1, 2011. As with many other firms, the firm also suffered a huge drop in value between 2008 and 2009 due to the financial crisis.
As discussed, Bird made a conversion to an income trust in 2006. This makes comparable numbers for dividends (during the corporate format pre-2006 and post-2010) and distributions (2006-2010) a little tricky. The conversion to an income trust in 2006 resulted in a drop in dividends (which technically became distributions). However, even during the income trust format, the firm continued to increase its distributions after the conversion; during the five-year period as an income trust, the distributions had compounded annual growth of 13.4%. This is not as strong as the 46.5% compound growth which occurred during the 2002-2005 period, but it is still impressive. For the period observed, dividend (distribution) growth was 20.77% compounded annually. In short, independent of the firm structure (dividend paying corporation vs. interest paying income trust), Bird has shown a consistent pattern of increasing the cash paid out to shareholders (i.e. unit holders 2006-2011). A point of concern however is the dividend payout ratio vis-à-vis the firm EPS. The payout ratio has remained high throughout the period observed, surpassing 100% in 2005. For the 2011 year (the first year as a dividend paying corporation) the payout ratio was 94%. Comparing dividends to free cash flow is another cause for concern, as observed by the 2011 payout ratio, which surpassed 300.0%.
Given the discussion above, based on P/E alone, the firm is attractively priced. Except for 2005, it has the market value of the firm relative to its underlying EPS has remained solid, breaking the 15.0 multiple for the first time in six years in 2011.
The current ratio is partially an area of concern, but more research as to the expectations of the industry is required before making a final call. Bird has kept its current ratio consistently at 1.20 or above, except in 2007. A conservative value investor normally targets a current ratio of at least 1.50. However, given Bird’s performance while maintaining its current ratio in the current range, may warrant a reevaluation of that particular metric when deciding if the firm is a worthwhile addition to an investor’s portfolio.
Note: For the 2008 and 2009 periods, the EPS seems flat. In the analysis I performed, I have been comparing net income as defined as comprehensive income and income from continuing operations. However, in 2009 Bird closed off its operations in Seattle Washington, which resulted in a loss of $3.9MM from discontinued operations. To provide a fair comparison, the net income used for 2009 was $60,795M, compared to the $56,913M listed in the 2009 financial statements; the 2010 annual report has a description of the discontinued operations.
With that said, EPS has been on the upswing, but took a hit in the 2010 fiscal year. This was to be expected; since projects are booked in advance, there was a hit on the backlog of projects in the 2009 year (2009 backlog ($901MM) was 18% less than the 2008 backlog ($1,105MM)), which affected the 2010 net total revenue.
One final note on the fundamental analysis. Reviewing Bird’s financial statements is a great exercise in investigating the ins and outs of changes to operations and accounting policies. The conversion in 2006 to an income trust, and the subsequent conversion back to a corporation in 2011, made it a little tougher to compare a firm whose corporate structure has remained constant over the period being reviewed. In addition to this, Bird converted to IFRS reporting in 2011 due to regulatory requirements in Canada. This resulted in a hit on the valuation of some items on the balance sheet and the income statement.
Based on the 2011 results, Bird is a solid firm, however it is overpriced. P/E is 16, P/BV is almost 3.0, and P/E × P/BV is 46.8. Ignoring the overpriced quality of the firm, while the business itself is easy enough to understand, I do have some other concerns:
- The dividend payout ratio as measured against EPS was 94.0% in 2011, and the dividend payout ratio as measured against free cash flow was over 300.0% in 2011. Exceeding free cash flow is a major read flag in my view, and doubly so when it exceeds 100% by a factor of three.
- While the country made it through he worst of the financial crisis years ago, due to the nature of Birds business it may be some time before the effects of the financial crisis are no longer affecting Bird’s bottom line.
There are some plusses for the company which I like:
- The ability of Bird’s management to maintain a constantly growing dividend is impressive, especially given the turmoil of the past few years. Their closing of operations in 2009 also speaks to their oversight in discontinuing operations which are not profitable or aligned with their corporate strategy.
- As of today (October 28, 2012), the dividend yield is an impressive 4.50%. With year over year growth of 20.8%, Bird would be a worthwhile addition to a dividend portfolio.
- Due to the nature of the business, they are part middle-person and part designer/builder. Their corporate strategy gives them the breadth to take on a wide variety of projects, and when the firm does not have the depth to undertake those projects on the design side, they are willing to subcontract that work out.
That said, I will definitely be revisiting Bird after the 2012 financial results have been published. The company, at least on paper, looks pretty solid. And except for some concerns due to the recent (i.e., past two years) financial conditions of the economy – but not necessarily the firm itself – I would be willing to jump in now.