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 came from 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 year.
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 CAD16.20 each.
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 months later.
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 mid-decade.
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 ( SGA ) 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 section of Canadian Edge .
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 book value.
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 opportunities for investing in Canadian dividend stocks and REITs out there.
Roger Conradis the editor of Canadian Edge and is a regular contributor on www.investingdaily.com . For more information on Canadian Income Trusts sign up to receive Roger's free onThe Top 3 Canadian Trusts to Buy Now