By: Philip MacKellar

Feb 12, 2024

Bird Construction Ltd. (BDT-T) has been a holding here at Contra the Heard Investment Newsletter since 2020. True to our contrary philosophy, at the height of the COVID-19 market meltdown when others were fleeing, we purchased shares in a variety of securities, including Bird at $4.70.

At the time, the investment thesis was straightforward. This enterprise was one of those names that looked as if it could endure the market meltdown and a prolonged recession. The security was beaten up, but the balance sheet was strong, dilution was not an issue, valuations were low and the dividend appeared sustainable. Insiders were buying and owned nearly 5 per cent of the company. The relatively new leadership team had inherited a struggling enterprise but had a clear turnaround strategy and their game plan appeared to be working: Margins were improving, and underpriced projects were being finished.

In the year that followed the purchase, the COVID waves became progressively worse and lockdowns intensified. In response, various governments across the country launched Keynesian-style infrastructure spending plans in a bid to stave off a depression. For fiscal year 2021-22, the federal government, for example, allocated $26-billion to infrastructure over a six-year period. They also coughed up $10-billion to the Canada Infrastructure Bank (the Crown corporation mandated to lend for infrastructure projects) and announced a federal Climate Plan with $15-billion in funding. Add on provincial spending, and the sums being thrown at the sector were huge.

In addition to benefiting from government spending, the enterprise started engaging in accretive M&A. In 2020, they bought competitor Stuart Olsonon the cheap, as it flirted with bankruptcy. The purchase turned out to be a steal as it allowed Bird to significantly expand its backlog of projects, push into more stable businesses with recurring revenue streams and cut duplicative costs. Since 2020, the organization has continued buying peers, though none of them have had the same scale or impact as the Stuart Olson acquisition.

Fast forward to 2023, and the stock had a great year. The ticker rallied 77.3 per cent and the monthly dividend was increased to 3.6 cents from 3.3 cents. In the third quarter, results showed strong year-over-year expansion, which exceeded consensus analyst estimates and even management’s forecasts.

Sales grew to $783.8-million from $688.2-million and the pending backlog of projects increased to $3.3-billion from $2.1-billion. EBITDA jumped to 6.3 per cent from 4.7 per cent, EPS ballooned to 54 cents from 27 cents, and the dividend payout ratio was around 20 per cent – far below management’s goal of keeping it slightly under 40 per cent.

Heading into 2024, the C-suite is anticipating top-line growth in the 6-per-cent to 8-per-cent range, and the analyst community currently has an average 12-month sell target of $17.31. Year-to-date, it is up about 7per cent, and starting next month the dividend is going up another 30.2 per cent to 4.7 cents a month. The distribution could get a further boost given the low payout ratio and the modest forward yield under 3 per cent.

Bird’s turnaround is now complete, and it is no longer a contrarian candidate. As a result, we sold about half the position in early January at $14.24, for a gain of 203 per cent. This sale locks in a good return and more than recovers the initial investment in the stock.

There could be plenty of upside, however. Bird has morphed from a contrary turnaround candidate to a growth company, with potential dividend appreciation to boot. Despite the solid top- and bottom-line performance and the run-up in the stock, the shares are still relatively cheap on a variety of metrics including price-to-sales, book, earnings, and EV multiples such as EV to EBITDA. Moreover, it still has a strong balance sheet with ample cash, high working capital and low debt. Finally, insiders continue to own nearly 5 per cent of shares outstanding and have not been active either buying or selling the stock in many months. If or when insiders start selling, it will be a cue to re-evaluate.

The company’s fourth-quarter and full-year results are due out March 5. For our part, we will watch the story unfold and look to see if the top brass can continue to execute on Bird’s growth strategy while managing the risk of a potential cyclical downturn in the industry.

Philip MacKellar is a writer for the Contra the Heard Investment Letter.