3/27/12: Closing Strong

By Roger Conrad • March 27, 2012

Fourth-quarter earnings season is finally over for Canadian Edge Portfolio Holdings. The good news is reporting closed on a winning note, with Conservative Holding IBI Group Inc (TSX: IBG, OTC: IBIBF) coming in with record quarterly and annual revenue–and guiding toward a drop in its 2012 payout ratio to 60 percent to 65 percent of distributable cash flow.

Fourth-quarter revenue soared 16.3 percent, while full-year sales rose 14.9 percent, both to new all-time records. Cash flow surged 18.3 percent for the year and 6.8 percent for the quarter. Cash flow margin rose to 14.6 percent of revenue, up 40 basis points from year-earlier levels. And full-year distributable cash flow ticked up 3 percent.

The full-year 2011 payout ratio sank to just 80.3 percent, down from 105.7 percent and the lowest level in several years. The fourth-quarter payout ratio, meanwhile, sank to 89.5 percent from 99.3 percent in the year-earlier period. Those likely aren’t low enough to ensure a dividend increase for 2012. But one is certainly quite possible if management meets distributable cash flow targets.

Doing so will likely depend on continuing to increase project backlog, a measure of future business based on current sales. It rose to 9.5 months at the end of 2011, and management has indicated it expects to push that higher this year as it maintains strong public sector orders (69 percent of business) and adds more private sector work.

IBI is also seeing considerably more business as a lead partner in projects, particularly as a sub-consultant with a piece of fee-based business. This is a consequence of successful expansion of geographic reach and expertise in recent years. And it means more consistent revenue and cash flow for the company going forward versus what has at times been an economically sensitive business.

IBI has also done a good job expanding the operations of businesses it’s acquired in recent years, posting organic revenue growth of 12.5 percent in the fourth quarter versus year-earlier levels. And it continues to speed up payments on its various contracts, reducing the amount of working capital tied up as accounts receivable and instead increasing cash with which to grow the business and minimize use of debt.

All this adds up to an operation in solid shape that’s set to grow in 2012 and the years beyond. It’s particularly well positioned to benefit from faster growth in the US. Buy IBI Group up to USD15 if you haven’t yet.

Here’s where I’ve analyzed fourth-quarter and full-year data and 2012 guidance for the CE Portfolio.

Conservative Holdings

Aggressive Holdings

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