National Post (National Edition)
BRIDGE REBUILD LETS CANAM STRUT ITS STUFF.
REBUILDING MONTREAL’S CHAMPLAIN BRIDGE IS A SOURCE OF PRIDE FOR QUEBEC’S CANAM. IT’S ALSO A CHANCE FOR THE COMPANY TO STRUT ITS STUFF
Sparks are flying at Canam Group Inc.' s manufacturing plant in Quebec City as workers cut, rivet and paint the beams that will be part of the replacement for the Champlain Bridge, the busiest single-span bridge in Canada. The bridge has been crumbling for many years and was deemed by the federal government in 2010 as “functionally deficient” and showing “significant deterioration.”
The bridge's replacement is a much-needed piece of infrastructure in Quebec, but it's also a big chance for Canam to show off the capabilities of a bridge division that for years has struggled to perform as well as some of the other parts of the company, which takes on approximately 10,000 projects every year.
“Champlain is a great opportunity for this division of Canam to showcase how good it can really be,” said chief executive Marc Dutil, 51, while walking between the massive steel parts on the floor of the 27,870-square-metre facility, just one of the Saint-George, Que.-based company's 22 plants across North America. “It's a source of pride for this team and it's a challenge they're undertaking very, very well. That's the source of excitement.”
You might expect investors to be just as excited.
The company, North America’s largest fabricator of steel components, has lowered its debt leverage and has a record project backlog, infrastructure spending is up across North America and it produced earnings per share of 18 cents in its first quarter, 89 per cent higher than in the same period a year ago.
Canam has also been getting a lot of love from industry analysts, but investors have remained much cooler with the stock trading at $13.30 on April 29, just above its $13.13 book value.
“There is a disconnect between the company’s financial performance and the stock price,” said Laurentian Bank Securities analyst Mona Nazir.
Despite investor apathy, Canam is forging ahead, with the Champlain project being the most valuable contract it has ever earned. Over the next two years, the girders and steel boxes that the company is making will be moved to Montreal and installed on the 3.4-kilometre bridge across the St. Lawrence River. The bridge is one of the most important structures in the country, with 160,000 daily crossings, and it’s a vital link for cross-border trade. “For us, the excitement of the project is the skills we learn, the productivity, the jobs we provide, hopefully the margins we create,” Dutil said. But he downplays the idea that it will add any prestige for the company. “It’s hard to deposit excitement at the bank. It’s hard to pay employees with excitement and I’ve seen more companies get in trouble because of a marquee job.”
Besides, Canam is working on a couple of high-profile projects aside from the Champlain Bridge, which is being led by SNC-Lavalin Group Inc.
For example, it’s helping to build the Atlanta Falcons’ new stadium as well as the retractable roof for New York’s Arthur Ashe Stadium, home of the U.S. Open tennis tournament. And Canam has a long list of other highprofile projects already to its credit, including a building for NASA, and a new arena for the NHL’s Edmonton Oilers.
On Friday the company announced its subsidiary St. Lawrence Erectors Inc. was awarded two more Montreal infrastructure projects: re- habilitating the city’s aging Jacques Cartier Bridge and the installation of the Lachine Canal Bridge.
Though most of these projects have been profitable, they haven’t always translated into better financial results. In 2009, when Canam took on a $122.8-million contract to build the retractable roof on Vancouver’s BC Place, the company reported a $25-million loss and ended up involved in a multi-million-dollar lawsuit with one of its subcontractors (it settled out of court).
The bridge division has also had its share of troubles in recent years, though Raymond James analyst Frederic Bastien said things are looking up after a disappointing multi-year stretch.
“We know tremendous efforts are being expended to ensure the bridge team earns a fair return on the major backlog it has successfully built,” he said. “In our view, none of this significant earnings upside is currently priced into the stock.”
The division’s management changed about six months ago and it is now being run by Marc’s uncle, Robert Dutil, who ran the unit about a decade ago before leaving for a stint in politics with the Quebec Liberal Party.
Bastien said the division under Dutil was making gross margins of 10 to 20 per cent, but last year it didn’t turn a profit. “Within the bridge division, they’ve had poor leadership since Robert left, so I’m happy to see him back in the saddle,” he said.
Canam has completed about five per cent of the work on the Champlain Bridge and will continue trucking the parts to Montreal until spring 2018. Although the bridge’s completion is years away and the beams that have been made are far from being installed, Robert Dutil said the schedule is still tight, especially considering Canam is providing only a piece of the $4-billion puzzle.
“When they erect the bridge, they will do it faster than we can produce it. That’s why we need to have a backlog,” he said.
So far, so good on that front and the future is shaping up nicely for Canam, said Laurentian’s Nazir.
“Discussions with peer companies and industry specialists points to a continued uptick in activity levels, while non-residential construction spend in both Canada and the U.S. is holding in and trending upward, which all bodes well for Canam,” he said.
But investors have had reason to be concerned about both the bridge division and large prestige projects in the past, which partly explains why the stock has been hovering between $10 and $15 for more than two years.
Another reason, however, is the cyclical nature of the non-residential construction industry. Nazir said it tends to work in seven-year cycles, which peaked in 2007 and again in 2014, so some investors are anticipating a trough.
“Investors are guarded given the drastic and rapid change from the cycle’s peak to trough periods,” he said.
But downturns have their upside, too, since Canam uses them to buy more affordable assets. As a publicly traded company, Nazir said, Canam’s strategy is unusual, since most organizations use profitable times to raise money and make acquisitions because their stock is up.
“In good times such as the ones that Canam is in ... the ability for the company to capture capital is very high,” Dutil said. “When times are bad, we will be able to acquire competitors, talent and machinery for less than it costs right now.”
In fact, Canam has only built one factory — its first.
Canam was started in 1961 by Marc Dutil’s grandfather, Roger, and in many ways it is still a family business. Dutil family members own about 13 per cent of the company, collectively making them the biggest shareholder.
Marc Dutil began working at the factory in SaintGédéon-de-Beauce, Que., grinding steel for a summer when he was 14. After graduating from Boston College in 1987, he founded a software firm before joining Canam in 1989, eventually taking the helm from his father, Marcel, in 2012.
The company has seldom had broad appeal with investors since going public on the Montreal Stock Exchange in 1984. In 2011, the company’s stock lost nearly two-thirds of its value in a matter of months, tumbling from $8.51 to a low of $2.96, after it cut its dividend.
“Even when they record strong earnings, it’s generally at the end of a cycle, so investors are very rarely willing to apply high multiples,” Raymond James’ Bastien said.
However, if retail investors don’t see the value of the company right now, Canam is showing that it does. In late February, the company announced its intention to buy back 10 per cent of its outstanding common shares over the next year.
Institutional investors, for their part, seem confident in supporting the company. At the beginning of April, Canam received a $50-million unsecured loan from the Fonds de solidarité FTQ, the Quebec-based development capital organization, which Dutil said will be used to strengthen the balance sheet so the company can make acquisitions in the next three to five years.
“Ultimately, a balance sheet is the floating line on your ship,” he said. “I look at whether my ship is above water or below water.”
Dutil adds it’s the books — not the fabrication — that present Canam with its biggest challenges as well as opportunities.
“If I were to see a smaller enterprise take on a project like this, my expectation is that the administrative side of the project would drown them,” he said. “When I was younger I underestimated the non-fabrication component of all these jobs. Today, we figured it out, I think. We’re quite comfortable, but it’s an unseen challenge. You’ll see the bridge going up, but you won’t see the million pages of documents that circulated to make that actually take place.”