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Canaccord sees construction sector as fertile ground for yield chasers

With the recent rush of trusts converting into common equity entities, there are plenty more solid dividend-paying corporations to choose from in the engineering and construction arena.

But given the cyclical nature of their business, is it still the right place for yield chasers to comb through?

Canaccord Genuity analyst Yuri Lynk believes so, maintaining in a report this morning that the sector is "exceptionally well positioned" to pay stable and growing dividend streams. He cited their low capital expenditure requirements and high levels of management and employee equity ownership.

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Canaccord's favourite high-yield idea is CanWel Building Materials , which has a strong balance sheet and currently pays an 8 per cent dividend yield. It also likes Armtec Infrastructure , which pays a handsome 9 per cent yield - a dividend Canaccord believes is sustainable.

But Mr. Lynk expects SNC-Lavalin and Finning International will be the only engineering and construction companies boosting their dividends in 2011. He forecasts a 15 per cent hike from both.

Manitoba Telecom Services Inc. stock is up about 8 per cent year to date, despite there being no major announcements and its mid-December its 2011 guidance, issued in mid-December, was largely in line with market expectations.

Canaccord Genuity analyst Dvai Ghose has a possible explanation. He thinks the stock rally has been driven by speculation over a turnaround at Allstream and a possible sale of the asset.

It's a bubble that could be setting itself up to burst, suggests Mr. Ghose.

MTS expects Allstream to enjoy significant margin expansion in 2011, but Mr. Ghose has his doubts. In the first nine months of 2010, 75 per cent of revenue came from declining segments, while EBITDA margin declined to 12.6 per cent from 13.0 per cent in 2009 and 18.6 per cent in 2008.

"While it may be possible to "fix" Allstream, former owners, including AT&T, have failed," said Mr. Ghose. "We believe it will take $75-million to $100-million to 'fix' Allstream due to severance and early termination charges." MTS' restructuring charge guidance for 2011 is only $10-million.

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Not all analysts are as bearish. A couple of weeks ago, TD Newcrest analysts suggested MTS offers the best risk-reward in the highly competitive telecom sector and noted it is currently trading below the average of its North American peers based on price-to-EBITDA ratios.

Downside: Mr. Ghose reiterated his "sell" rating and $23 price target.

Transat A.T. Inc. shares are trading at historic lows, at 2.3 times consensus fiscal 2012 EBITDA compared with an historical average of 4.5 times. This suggests a good buying opportunity, according to CIBC World Markets Inc. analyst Kevin Chiang, who notes Transat's strategy for this winter appears to be successful as it benefits from improving demand, higher prices for most destinations and lower input costs.

Upside: Mr. Chiang upgraded the stock to "sector outperformer" and maintained his $25 price target.

Cequence Energy Ltd. is enjoying drilling success at several wells in the Wilrich and Montney horizons in Alberta. As a result, Canaccord Genuity analyst Brian Kristjansen is now including both plays in his valuations and has increased his production estimates for the company over the next two years.

Upside: Mr. Kristjansen upgraded the stock to a "buy" from a "hold" and hiked his target price to $4.50 from $1.55.

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Bombardier Inc.'s "mojo" is slowly returning, UBS analyst Tasneem Azim declared after a visit with management last week. Bombardier revealed that the order outlook for business jets has improved, and recent results from other business jet makers suggests overall business conditions are strengthening, he said.

Upside: Mr. Azim raised his price target by 50 cents to $7.

Legacy Oil + Gas Ltd. has acquired light oil assets in the early stage Spearfish exploration play in southwest Manitoba, where other operators are experiencing favourable economics. "Given that the Legacy management team has shown the ability to both identify underexploited assets and efficiently integrate them, we view this acquisition as very positive," said Desjardins Securities Inc. analyst Allan Stepa,

Upside: Mr. Stepa raised his price target to $18.50 from $14.75.

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About the Author
Investment Editor

Darcy Keith is The Globe and Mail's Investment Editor. He has been a business journalist since 1992 and joined the Report on Business in 2010 from Yahoo! Canada, where he was the senior editor of finance. More

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