3/22/13: Two More Down, One to Go

By Roger Conrad • March 22, 2013

On Monday, March 25, Colabor Group Inc (TSX: GCL, OTC: COLFF) will report its fourth-quarter and full-year 2012 earnings. That will close the book on earnings reporting season, with less than a week to run in the first quarter of 2013. Earnings season for the latter reporting period will kick off when Shaw Communications Inc (TSX: SJR/B, NYSE: SJR) posts numbers on April 12.

This week we got numbers from Aggressive Holding IBI Group Inc (TSX: IBG, OTC: IBIBF) and Conservative Holding Innergex Renewable Energy Inc (TSX: INE, OTC: INGXF). The good news: no real surprises, support for current dividends and continued progress on both companies’ long-term growth plans.

IBI’s press release announcing its earnings was titled “Bold Steps in Recovery Program.” The document basically addressed the benchmarks introduced with the dividend cut announced Dec. 12, 2012.

These included applying CAD13 million in annual cash savings from the dividend cut to debt reduction, realigning staff costs to productive markets, introducing a dividend reinvestment plan to reduce cash dividend needs, reducing collection times for accounts receivable, complying with debt covenants, cutting US goodwill on the books, consolidating executive functions and finding new acquisitions.

Executing on these plans required taking charges against fourth-quarter 2012 results. Nonetheless, the company reported modest revenue growth of 5.4 percent, excluding items, and relatively flat cash flow and net income.

The fourth-quarter payout ratio was 83.9 percent, down from 89.5 percent in the year-earlier period. That will come down sharply in 2013 due to modest revenue growth and the dividend reduction.

As for benchmarks, sales in Canada remain robust and are expected to improve this year, even if the economy slows, as some fear. US operations are being rationalized, and growth elsewhere is solid. The percentage of accounts receivable for more than 90 days has been cut to 41.2 percent, down sharply from 47.9 percent in 2011. And working capital tied up is 139 days.

That’s considerable progress that should continue in 2013. Management’s current guidance is for a 4 percent boost in fee volume, pacing 2.5 percent to 4 percent growth, excluding acquisitions.

Some 77 percent of order backlog is now committed fee volume for 2013, the company’s strongest position since 2009. Sixty percent of this is in the home market of Canada, with 23 percent in the US and 17 percent elsewhere.

That’s more than enough progress to keep the stock as an Aggressive Holding. And it justifies the 10 percent increase in insiders’ holdings the last six months as well as a recent flurry of analyst upgrades that have left the Bay Street count at three “buys,” seven “holds” and no “sells.”

IBI Group is a buy up to USD8 for those who don’t already own it.

Innergex is back trading below my long-standing buy-under target of USD10. That makes now a great time for patient investors to establish positions in this very strong renewable energy producer, which this week announced solid fourth-quarter and full-year 2012 numbers as well as positive guidance.

The company is fundamentally an invest-to-grow story, completing two major power plants in 2012 that will fuel 2013 results. And there are a range of projects set for startup this year to power 2014.

Unlike thermal power, renewable energy projects need only successfully bid to build and execute construction on time and budget. Capital expenditures are almost all up-front. But once the plant starts up producers are ensured a solid revenue stream for decades, no matter what happens to the overall power market.

And Innergex has cultivated good relationships with regulators across Canada, including local First Nations officials in several provinces.

The company reported a CAD57 million increase in construction cost estimates portfolio wide, mainly related to hydro projects in British Columbia, CAD30 million of which is BC’s Provincial Sales Tax. That’s partly offset by output increases at facilities as well as cost efficiencies through scale.

Cost increases will require Innergex to issue an additional CAD15 million to CAD17 million in equity in coming months, which is likely a factor in the stock’s recent dip. But management affirmed during its quarterly conference call this won’t significantly affect the profitability of the plants’ contracts, which are for an initial term of 40 years.

In the meantime its financial position remains solid.

Fourth-quarter power generation rose 34 percent, boosting revenue 46 percent, largely on a 25 percent boost in capacity from new projects. Output was 97 percent of the long-term average, slightly less than in 2011 but demonstrating the value of geographic and source diversification. The company expects another 9 percent capacity boost this year, with a 12 percent jump in output and 10 percent revenue growth.

The biggest worry is further rises in costs at the company’s ongoing projects, and that’s weighing on the stock to some extent. But based on these numbers the company is still finding accretive projects within its core competency of wind, hydro and solar.

Innergex’ normalized earnings per share of CAD1.29 were up 4 percent and covered the dividend comfortably with a payout ratio of 45 percent. That’s enough room for dividend increases, though management is likely to continue using spare cash for development. Innergex is a buy up to USD10.

Here’s where to find analysis of Canadian Edge Portfolio Holdings’ fourth-quarter and full-year 2012 earnings.

Conservative Holdings

Aggressive Holdings

Stock Talk

Comments Guidelines
Guest User

Guest User

Could you comment why IBG has dropped over 20% since their last earnings report? I thought your interpretation of the results was that it wasn’t bad news at all?

Investing Daily Service

Investing Daily Service

Hi Guest:

The recent drop may be an immediate reaction to the recent reporting. As stated in the article, Roger still feels that “since 77 percent of order backlog is now committed fee volume for 201”,it is a BUY in the Aggressive portfolio.

Allan Lynch

Allan Lynch

Have any clue whats going on at Just energy JE?

Gary Lundberg

Gary Lundberg

We need some feedback on the collapse in price and extreme market volume on Just Energy.

Charles Meike

Charles Meike

I recognize that posts such as this don’t stay on your system very long, but it seems worth letting you know what your recommendations do to some “conservative ” retirees.
I was a former investor with “Canadian” and experience Yellow Media. Off for two years.
Came back in early February – invested 170K in mainly conservative (average safety “5”) across 16 stocks.
Lost about 19K (11%) in a couple of months during what was basically a rally.
Led by AT and JE (stock of the month, February – off on my investment over 20% in March) my board shows three “winners” and 13 losers.
This is OK -part of investing – but your sunny summaries irk me.

Roger Conrad

Roger Conrad

I hope everyone has had time to read the rather long Flash Alert I sent out yesterday on the four companies I’m still carrying in the Canadian Edge Portfolio that have cut dividends in the past year: Atlantic Power, Colabor, IBI Group and Just Energy. It pretty much lays out what’s going on and the benchmarks we’re holding each to in order to keep them in the Portfolio. As such, I think it will answer whatever questions you have.

Add New Comments

You must be logged in to post to Stock Talk OR create an account