BMW Toronto, built by Bird Construction.
Philip MacKellar is a writer for the Contra the Heard Investment Letter
Bird Construction was purchased here at Contra the Heard Investment Newsletter for $4.70 during the height of the market meltdown in March, 2020. For those new to the name, Bird is a general contractor focused on industrial, commercial and institutional construction projects. Though the purchase occurred only a week before the stock market bottomed, timing the nadir was neither part of the thesis nor the goal. Instead of trying to find the perfect entry point, my objective during sell-offs is to find names that can weather the storm, and to consistently deploy capital as other investors flee. Countertrend investing like this is difficult, as it requires considerable preparation and gumption – but the results can be well worth the effort.
BDT was one of those names that looked like it could endure the market meltdown. Furthermore, I thought its business could survive a deep and protracted COVID-19 recession. The company’s balance sheet was strong, the valuations were low and the dividend appeared sustainable. Meanwhile, corporate insiders were buying, and managers and directors collectively owned nearly 5 per cent of the shares outstanding. Moreover, the relatively new management team had a clear turnaround strategy in place, and their game plan appeared to be working; margins were improving, and poorly priced legacy projects were being finished. The final plank of the investment hypothesis was the possibility of government-funded infrastructure spending.
That proposition has played out well already, as governments are throwing massive sums into the construction sector. For fiscal year 2021-22, the federal government allocated $26-billion to infrastructure over a six-year period. They are also coughing up $10-billion to the Canada Infrastructure Bank and announced a federal climate plan with $15-billion in funding. Provincial governments have earmarked or spent even more for various projects. That says nothing of the United States and the plans many levels of government have announced there, too. Furthermore, the current spending spree may be far from over, with President Joe Biden and Congress near to closing their US$1-trillion-plus infrastructure package, and a snap election here in Canada that is bound to spawn more spending promises.
In addition to government stimulus, Bird Construction has benefited from industry consolidation. In mid-2020, they purchased competitor Stuart Olsen on the cheap as it flirted with bankruptcy. Since then, the two companies have integrated their operations and realized approximately $25-million in annual cost savings. The purchase also increased Bird’s backlog, facilitated cross-selling opportunities and exposed Bird to the master-service-agreement market, which helps enact transactions or agreements more efficiently. This is important because it results in more recurring revenues, and through that, smoother cash flows.
Second-quarter results reflected these tailwinds, with sales ballooning 97 per cent to a record $556-million. The construction backlog hit its highest as well, jumping 69 per cent versus the prior-year quarter. Profit clocked in at $13.6-million versus $5.6-million this time last year. However, operating and free cash flows were both negative, and cash on hand declined as well – though part of this decline is due to reducing debt. Over all, the balance sheet remains strong, with an adjusted net debt-to-trailing 12-month EBITDA ratio of just 0.54.
Looking forward, 63 per cent of the backlog is expected to be converted into revenue over the next year. On the latest conference call, chief executive officer Teri McKibbon sounded optimistic, saying “[the] outlook is becoming brighter by the day.” Mr. McKibbon sees improvement in the natural resource sector, continued government spending, and predicts higher revenues for the remainder of 2021. Later this year, management plans to release a new three-year strategic vision, contemplating it will be as successful as the turnaround thus far.
Our initial sell target for the stock is between $12 and $14, leaving plenty of upside should that fair value estimate be achieved. While selling half the position within that range is the preliminary goal, we think Bird has wind under its wings, and will continue to hold the remainder of our stake to see how far it can fly.
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