Mayor David Miller speaks with officials from the Toronto Water and Transportation Services at the site of two sinkholes.JENNIFER ROBERTS
Consumers may not be throwing their money around, but governments certainly are.
Consider some recent contract announcements: Bird Construction Income Fund is receiving $85-million from Ottawa to build a hangar at CFB Trenton; Armtec Infrastructure Income Fund scored a $27-million deal to supply sewer piping to the Ontario municipality of York-Durham; Fluor Corp. has won a $67-million (U.S.) contract with the U.S. Army in Iraq.
After being clobbered by the credit crunch, the shares of engineering and construction firms that design and build the roads, bridges, schools, hospitals and power plants that will underpin tomorrow's economy are on a rebound.
But it is a tricky field to play because these companies typically serve both hot and cold sectors. Education and health care infrastructure, for example, are expected to benefit from billions in government stimulus packages, but oil sands projects are suffering from delays and cancellations.
Engineering and construction companies are facing slower growth than in the boom days prior to last summer. But bullish investors see an opportunity as credit becomes more accessible and the price of materials - everything from steel to asphalt - stabilizes. They reason that plans deferred last year could get the green light soon and government funds will pave the way for new projects.
Of the $787-billion committed in the American Recovery and Reinvestment Act, about $150-billion is destined for infrastructure projects. Billions more will flow in Canada between now and March, 2011, when Ottawa's $40-billion (Canadian) stimulus package is scheduled to end.
Canaccord Adams Inc. is advising clients to maintain some exposure to engineering and construction stocks, given their generally healthy balance sheets and good visibility.
"At this stage we're looking for exposure to late cyclical, non-residential, construction verticals such as civil and institutional. We see the oil sands build-out in a mid-cycle recess along with the power market, although the visibility on the latter is murky. It's still too early for commercial or broad industrial exposure," Yuri Lynk and Catherine Siu wrote in a report this week.
The analysts note that construction material costs are down more than 9 per cent since last year, and while labour costs are up almost 3 per cent, so is productivity.
They list their top picks in the sector as: Armtec Infrastructure Investment Fund, ADF Group, Finning International, and SNC Lavalin Group.
Armtec, which makes pipes, highway barriers and pre-cast concrete products, derives 60 per cent of its business from public works, 20 per cent from commercial and 10 per cent from residential. It has no exposure to oil and gas or the U.S. market, Canaccord says.
ADF, which makes structural steel, gets 28 per cent of its sales from public works, and 53 per cent from commercial projects. Most of its work is in the U.S., including a deal to supply the developer of New York's Freedom Tower.
Another Canadian player with U.S. exposure is Stantec Inc., an engineering services firm with a focus on the health and education sectors.
"It has one of the best practices across the continent [in]urban design and urban land development," Benoit Caron, of National Bank Financial Inc., noted in a report.
When the U.S. emerges from its housing crisis and first-time buyers re-exert their presence, urban land development services will be in demand, he said.
Mr. Caron also likes IBI Income Fund, an architectural design firm that specializes in municipal systems, schools, hospitals and mass transit-related infrastructure. About 25 per cent of IBI's business is in the U.S., emphasizing health care and education projects.
He has "outperform" ratings on both stocks and 12-month targets of $36.50 on Stantec and $19 on IBI.
Mr. Caron's highest praise is for Bird Construction Income Fund, which he recently labelled "a table-pounding outperform," after initiating coverage on it last month. He thinks the stock can hit $40 in the next 12 months.
Bird is one the cheapest publicly traded general contractors, trading at 8.4 times estimated earnings this year. "The valuation is at odds with the organization's track record and crisp execution," he wrote.
Bird's management got ahead of the economic crisis by redirecting its bidding efforts to publicly funded infrastructure projects. That has kept its order book healthy amid delays in the Canadian oil sands, he said.
Mr. Caron considers Bird's 5.3-per-cent payout, "very safe" and the company's balance sheet "a fortress" with a war chest of $163-million, the equivalent $11.65 a share.
Shares of Canadian contractors continue to trade at a discount to their U.S. counterparts, such as Granite Construction Inc. of California. But the valuation gap is closing, as investors focus on the fact that Canada enjoys a healthier economy with better public finances, he said.
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Exposed infrastructure
Not all companies in the industry compete head to head. The table below breaks down the key sectors and geographic exposure for each player.
ADF Group Inc.
Public work: 28%
Commercial: 53%
Industrial/Other: 19%
Aecon Group Inc., ARE
Oil & gas: 22%
Public work: 60%
Commercial: 5%
Residential: 5%
Industrial/Other: 8%
Armtec Infrastructure Income Fund
Public work: 60%
Commercial: 20%
Residential: 10%
Industrial/Other: 10%
Bird Construction Income Fund
Oil & gas: 39%
Public work: 32%
Commercial: 29%
Churchill Corp., CUQ
Oil & gas: 20%
Public work: 55%
Commercial: 21%
Industrial/Other: 4%
IBI Income Fund
Public work: 60%
Commercial: 15%
Residential: 10%
Industrial/Other: 15%
Seacliff Construction Corp.
Public work: 50%
Commercial: 29%
Residential: 4%
Industrial/Other: 16%
SNC Lavalin Group Inc.
Oil & gas: 19%
Public work: 35%
Industrial/Other: 46%
KATHRYN TAM / THE GLOBEAND MAIL // SOURCE: CANACCORD ADAMS