Black Diamond Group Ltd., an enterprise that primarily rents and sells modular work-force accommodations, has been hampered by rough times. While its operations do extend into sectors such as construction, education and real estate development, among others, much of the firm’s revenues are dependent on the resource arena. The decline in the oil patch caused the top line to plunge from $387-million in 2014 to $166-million in 2017. An accompanying drop in net income saw it plummet from black ink of better than $20-million to red ink of $95-million. It rebounded somewhat to a loss of $11-million in 2018. Still not very savoury.
Despite the poor numbers, the company (BDI-T) was added to a Contra portfolio at the end of 2018 at $2.11. We had been carefully watching this concern for several years.
When revenues cratered, the company worked hard to cut debt, which peaked at $196-million in 2014. Currently it resides around $83-million, with management pledging to slice it even further. Funds from operations have been $33-million in the first nine months of this year.
There has been some recent good news. A 304-bed project in Kitimat, B.C., is in the cards. A bigger payoff should arrive via a $42.5-million 908-bed camp planned to accompany the construction of the Coastal GasLink pipeline, in conjunction with the West Moberly First Nations in northern British Columbia. Although all projects to lay pipe seem tentative these days, there is a high probability that the Coastal GasLink will happen as planned. All 20 elected First Nation councils along the route have agreed to the project, although a group of eight Wet’suwet’en Nation hereditary chiefs remain opposed.
Given the problems in the Western Canadian resource sector, Black Diamond has focused on creating revenues outside this space. About 70 per cent of sales are now from other locales and the corporation would like to continue that expansion. At the same time, the recovery in oil prices has helped to firm the bottom line and better results are expected this year.
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One encouraging sign is the continuity of management. Trevor Haynes is the chairman, president and CEO, positions he has held since co-founding Black Diamond in 2003. Ideally, we would like to see a couple of people sharing these positions, albeit it is less expensive to only have one. Toby Labrie, executive vice-president and chief financial officer, has been with the enterprise for about a decade. The rest of the management ranks oozes experience. The insiders seem to believe strongly in the future of this organization, as they have been heavy buyers of shares.
Our initial sell target on BDI is $10.24. While some might paint us as optimistic as we seek almost a five-bagger, or five times our initial investment, given the historical trading price of this business our mark does not appear excessive. The stock remains far below the $34-plus level where it traded in 2014. The company will report results on May 2.
Benj Gallander and Ben Stadelmann are co-editors of Contra the Heard Investment Letter.