During the final production of the March 2015 Canadian Edge we learned that recent Conservative Holdings addition Algonquin Power & Utilities Corp (TSX: AQN, OTC: AQUNF) would delay announcing its fourth-quarter and full-year 2014 results.

The March 5 statement, released after the market closed, offered no reason for the delay. It did say that Algonquin Power & Utilities Corp (APUC) would instead report those results March 26.

As Associate Editor Ari Charney noted in last month’s Canadian Currents, on March 6, APUC sold off hard, losing about 9% of its market value before hitting bottom on March 13 after a decline of more than 17%. We speculated that the delay was about APUC’s response to the Canada Revenue Agency’s (CRA) proposed reassessment of the company’s income tax filings for 2009 through 2013, specifically the accounting for its conversion from an income fund to a corporation in October 2009.

This is not the case. The reality is much more benign and only underscores just how overdone the recent selloff was. For proof of APUC’s strong underlying business, look no further than its results for the three and 12 months ending Dec. 31, 2014, which the company reported 10 days ahead of the revised schedule. According to a management statement on March 15, the delay was because of “certain anonymous, unproven allegations regarding certain APUC personnel.”

An assessment that a committee of independent directors conducted, with assistance from outside legal and accounting advisors, concluded that the allegations didn’t affect APUC’s financial results. An investigation into allegations unrelated to financial reporting is ongoing.

Note that the CRA reassessment concerns only 10% of APUC assets used to reduce or eliminate its corporate income tax. APUC, which will challenge the CRA’s conclusions, won’t pay corporate income tax until 2022.

APUC rallied 13% since March 13 but still sits well below its 52-week high of CAD10.51 in early February. At current levels it yields 4.6%.

As for the financials, APUC reported a 39.7% rise in 2014 revenue, driven by the acquisition of the New England Gas System, stronger demand, the effect of rate case settlements, increased hydrology and wind resources, and the stronger U.S. dollar. Adjusted net earnings per share (EPS) jumped 42.3% to CAD0.37, while adjusted funds from operations grew 26% to CAD0.92.

Approximately 83% of the energy from APUC’s hydro, wind and solar facilities has been sold under long-term contracts with an average duration of 14 years. And power-purchase agreements with an average contract life of seven years cover 91% of the thermal energy APUC produces.

The 100%-regulated Distribution Business Group—including electric, natural gas, and water and wastewater systems—is also diversified geo­graphically, reducing risk further. Plus, the company’s participation in a natural gas pipeline transmission project with Kinder Morgan Inc (NYSE: KMI) means APUC operates across the entire utility spectrum.

APUC continues to draw substantial support on Bay Street, with eight “buy” recommendations, one “hold” and two “sells.” All recommendations are current as of March 16, except for those to “sell,” which are much older. Those two recommendations date back to November and July 2014. So they’re basically worthless in reflecting the current state of APUC’s underlying business.

The delayed earnings announcement, particularly its timing, was unfortunate. Although our guess about the cause was off, the true reason was of even lesser consequence.

Algonquin Power & Utilities is once again a buy, up to USD9.25.

Designated Hitter

The market continues to value DH Corp’s (TSX: DH, OTC: DHIFF) ability to clean up on the mergers-and-acquisitions (M&A) front, where, as with baseball, misses far outnumber hits.

But DH hit it out of the park with Harland Financial Solutions, which it acquired in 2013. Similar results are expected from its deal to buy Fundtech, announced in March.

Unlike on the diamond, however, where a .300 batting average will get you into the Hall of Fame, a one-in-three M&A success rate will earn management teams one-way tickets back to the bus leagues and make cellar-dwellers of companies. And according to a recent article in the Harvard Business Review “study after study puts the failure rate of mergers and acquisitions somewhere between 70% and 90%.”

But DH’s deal for Harland, completed in August 2013, cemented its continental platform and established a foundation for expansion. Before the USD1.2 billion Harland deal, DH provided lending and payments services but had not offered a core-banking solution. Harland’s core-banking client base, which exceeded 5,000 at the time of the deal, boosted DH’s client base exponentially and created significant opportunities to cross-sell ancillary products and services.

The deal also drove significant growth in 2014, as revenue from continuing operations grew 36.1%, adjusted EBITDA rose 42.3% and adjusted EPS were up 15.8%.

The market greeted the Harland deal with initial optimism that has since been supported.

DH’s March 31 announcement of a USD1.25 billion deal to acquire Fundtech met with a near 8% rally on the Toronto Stock Exchange, suggesting the market believes management knows how to swing the M&A bat. That includes defining a clear strategy and communicating it between merger parties while managing ongoing projects and combining the two businesses simultaneously.

Fundtech, like Harland, has expanding capabilities in a high-demand business. The acquisition puts DH right in the middle of the world’s increasing need for real-time payments. Fundtech’s market-leading software platform is relevant to DH’s existing customer base in Canada and the United States and will make the company more relevant to global financial institutions, including large U.S. banks. Management expects the deal “to be accretive to adjusted net income per share within the first 12 months” following completion.

DH Corp, poised for strong growth in 2015 and beyond and still trading at an attractive valuation, is now a buy under USD36.

Conservative Update

Northern Property REIT (TSX: NPR-U, OTC: NPRUF) reported a 5.3% increase in 2014 funds from operations per unit, as net operating income improved 4.6%.

Management noted that the REIT’s diversified portfolio, low payout ratio and solid balance sheet position it to weather the commodity-price
downturn afflicting its operations in western Canada’s oil patch. Northern Property will boost its capital expenditures in 2015, while pinning its expectations for growth on the development of 400 to 500 units in Calgary.

Meanwhile, the weaker economy, a result of  crude oil prices dropping rapidly in late 2014, will continue to put pressure on vacancy and operating results in two of the company’s key regions in Alberta: Fort McMurray and Lloydminster. Northern Property remains a hold.

Brookfield Real Estate Services Inc (TSX: BRE, OTC: BREUF) reported that cash flow from operations for the 12 months ending Dec. 31, 2014, was CAD25.9 million, or CAD2.02 per share, up from CAD25.2 million, or CAD1.97 per share, for 2013. Royalties of CAD37.4 million increased from CAD36.3 million, while net earnings improved to CAD3.9 million, or CAD0.41 per share, from CAD900,000 or CAD0.09 per share.

About 71% of revenue comes from fixed broker and agent fees, insulating the company’s cash flow from market fluctuations. Brookfield Real Estate Services, which yields 8.5%, is a buy under USD14.

Note that we’ve adjusted our buy-under target for Keyera Corp
(TSX: KEY, OTC: KEYUF) to reflect a two-for-one share split effective April 6, 2015. Keyera is now a buy under USD40.

Aggressive Update

New Flyer Industries Inc (TSX: NFI, OTC: NFYED), which we added to the portfolio last month, reported a 20.8% increase in revenue, a 13.4% increase in adjusted EBITDA and a 45.3% increase in cash flow for fiscal 2014. The payout ratio based on cash flow declined to 49.6% from 68.1%, suggesting ample room for a dividend increase.

New Flyer’s estimated bus market share was approximately 48%, up from 43% for fiscal 2013. For the aftermarket parts segment, estimated market share increased to about 33% from 28%.

During its first month as a portfolio holding, New Flyer generated a 9% total return in U.S. dollars. New Flyer, which still yields 4% after its solid rally, remains a buy under USD12.

Noranda Income Fund (TSX: NIF-U, OTC: NNDIF) reported a 53.6% decline in its 2014 cash available for distribution and posted a CAD27.9 million pre-tax loss from asset impairments. They were the result of management anticipating a shift to market-based pricing after May 2017, though higher zinc sales and improved premiums drove a 13.8% increase in revenue.

Management noted during its quarterly conference call that though it continues to negotiate with potential counterparties, it has yet to hammer out a deal to succeed the current zinc concentrate supply agreement with Glencore Canada that expires in May 2017.

It’s possible that Noranda’s zinc processing facility will be shuttered. It is, however, the second-largest zinc-processing facility in North America and the largest in eastern North America, where the majority of zinc customers are. So the agreement probably will continue beyond May 2017. At the same time, any new supply agreement will be based on market prices for processing zinc concentrate instead of the fixed rates under the current agreement.

Had market rates been in place, Noranda would have generated less cash flow over the past few years. As it is, Noranda remains on the Dividend Watch List (see p. 2) because the company’s cash flow, if not its existence, is threatened. Noranda remains a buy for aggressive speculators under USD4.

Bird Construction Inc (TSX: BDT, OTC: BIRDF), under pressure because of its exposure to construction activity in the Canadian oil sands, delivered a 2.5% increase in 2014 revenue and a surge in net income to CAD36.2 million versus CAD12.1 million a year ago. Management attributed the growth in 2014 earnings to higher gross profits after the company shifted to higher-margin industrial work. That combined with the adverse effect of a project loss of CAD20.5 million recorded in 2013 helped beef up Bird Construction’s bottom line.

Bird secured CAD1.245 billion of new construction contracts, including change orders on existing contracts, contributing to a backlog of CAD1.149 billion at the end of last year. That’s down from CAD1.269 billion on Dec. 31, 2013, reflecting the slowdown in the oil sands. Management also cautioned that margins could be negatively affected in 2015 because of the uncertainty surrounding the energy market.

The company continues to expand its industrial footprint with two new transportation projects  announced in 2015. Bird is also exploring opportunities in the retail and commercial segments and is bidding on a number of institutional and public-private partnership projects as well.

In view of the energy-related pressures affecting results for 2015 and even 2016, we’re lowering our buy-under target. Bird Construction is now a buy under USD10.

Note that Magna International Inc (TSX: MG, NYSE: MGA) has completed a two-for-one share split. We’ve adjusted our buy-under target accordingly. Magna is now a buy under USD60.