Every month, David Dittman and I provide Canadian Edge
subscribers with updated dividend safety ratings for over 150
Canadian high-yielding trusts and corporations in a section we call
How They Rate
The greatest fallout featured in our July update of
How They Rate
Armtec Infrastructure Inc
(TSX: ARF, OTC: AIIFF), which eliminated its entire
distribution after posting abysmal first-quarter numbers.
The results clearly took Bay Street by surprise, demonstrated by
the stock's plunge starting in early June from a longstanding
trading range in the mid-teens to a low of just CAD2.53 per share
by Jun. 22.
The stock price has since benefitted from some bargain hunting
but is still nearly 80 percent below where it began the
The company is now the target of at least one shareholder suit.
That stems from the fact that from mid-March to early April it
raised CAD57.8 million selling 3.565 million shares at a price of
That money was used to cut debt, no doubt a plus in the
company's recent negotiations with creditors. On Jun. 27 those
lenders agreed to amend an existing deal, allowing Armtec to draw
up to CAD65 million in additional funding. However, it does raise
questions as to just what Armtec management knew about how things
were going as well as what it might be forced to do less than two
As for the numbers, revenues actually rose 4.8 percent. The
company's Engineered Solutions division's 21.4 percent revenue
growth was able to offset lower Construction and Infrastructure
Applications product volumes; revenue from the latter was down 15.6
percent. Profit plunged, however, to just 6.4 percent of sales from
11.9 percent a year earlier. Meanwhile, cash flow swung sharply
negative, as competitive pressures took their toll even as order
backlog remains depressed. Management also blamed "weather
conditions" for lower work volumes.
Another disturbing item in the results was "finance expense,"
essentially the cost of servicing Armtec's debt, which surged by
74.6 percent. That figure will probably rise further following the
amendment to the company's credit agreement, though the company
apparently faces no significant debt maturities now until
Based on the numbers behind the numbers, there are some hopeful
signs for the company's underlying business. For one thing, it's
been successful winning transportation infrastructure projects.
These are a very secure source of revenue and, once won, are
largely immune from recession pressures. Selling, general and
administrative expenses (
) were also lower as a percentage of revenue than a year ago, the
benefit of a 2010 corporate reorganization.
In assessing Armtec's outlook, management has hopeful things to
say about the company's ability to rebuild backlog through
private-sector work, particularly on the growing Engineered
Solutions side. Nonetheless, it also stated it "does not anticipate
improvement until the end of 2011" while margins "are not expected
to fully rebound to pre-recession levels during 2011."
There's one other very big problem here, at least in my view.
Armtec management had previously stated its desire and ability to
pay a quarterly dividend at an annualized rate of CAD0.40 per
share. The abrupt reversal of that pledge, combined with the hefty
volume of red ink in the first quarter, is a severe blow to
credibility, and is the primary reason behind our downgrade of the
company's safety rating in the
How They Rate
No Bay Street analysts changed their opinion in the wake of this
news, and the count remains current one buy, four holds and two
sells. The stock appears to have stabilized, and it's hard to
imagine much additional downside from a price of just 34 percent of
On the other hand, I don't see a lot of merit to holding a
company paying no dividend that makes this kind of jarring moves
with little or no warning, especially when there are so many other
investing in Canadian dividend stocks and REITs
is the editor of Canadian Edge and is a regular contributor
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