MCR.V - Macro Enterprises

[bz1516]

Macro Enterprises, MCR.v  is a pipeline infrastructure company.  It does pipeline maintenance as well as construction.  It’s located in Ft St John, BC. I like both the company and the sector.  The company has shown excellent growth and the stock has responded accordingly. 

 

In addition to the strides the company has made in expanding its business already, the advent of increased natural gas production with an LNG port on the coast of BC raises the probability that the strong growth in revenues and profitability for this company will continue into the foreseeable future.  Obviously there needs to be a pipeline built between the coast and the ng fields in Alberta and eastern BC. 

 

Canada is getting closer to putting the whole package, the producing wells, the pipeline and the LNG port together.  There are several proposals for LNG terminals on the coast in northern BC. As an example of the timing in which capital commitments are being made, another portfolio position I have, TDG, announced not too long ago they ordered a new rig to respond to the expected demand for ng drilling due to the expected demand for LNG on the BCC coast. 

 

Despite already significant increases in selling price, MCR still sells at 3.5x EPS, 4.3x fully diluted. In comparison Bird Construction is selling at a PE ratio of ~11x.

 

There are currently two analysts following MCR.  Both Paradigm and PI Financial just started coverage in the last several months.  There are still no funds or institutions yet.

 

Earnings have grown rapidly in the last several years. They earned $.78 FD this past year, and I expect they will earn $1.60 this year, ~$1.30 FD. The stock is currently trading around $5.60 per share. 

 

While earnings have not been that lumpy, they get a lot of smaller contracts relatively quickly, its not possible to project accurately too far out because of the short cycle from when they get the job to when its completed.

 

The current conditions that have enabled the company's growth so far are still in place according to the CFO. Guidance for Q3 2013 is for an increase over Q3 2012, and guidance by this company has been conservative to the extreme.  The positive tone of business has allowed the company to be more selective in taking on business. This has contributed to the recent margin improvement we have seen since 2012.  In addition they acquired Enbridge as an account with an acquisition they made for less than BV in Q4 of last year.  I believe Enbridge may now be their largest account, though the company refuses to confirm or deny.

 

MCR specializes in doing smaller contracts. The large number of small contracts they normally get are more like maintenance capex or opex than part of larger capital spending decisions, so this insulates them at least partially from the cycle. Their customers are mostly the larger cap oil producers and pipeline companies like Encana, Talisman and Trans Canada, and more recently Enbridge. The list of their largest accounts is available in their presentation from Q1.

 

Because of increased margins from taking on better quality work and the general tone of business, the results of the company have increased dramatically in the last few quarters. This has led to sharp increases in net income and caused the stock to increase in price. However the earnings have grown so rapidly the share value metrics remain excellent. The company has enough equipment as a result of their acquisition to substantially increase revenues from current levels without purchasing additional equipment. 

 

The company has now largely recharged their balance sheet from when they had leaner years.  They have no current plans to pay a dividend.  They are threatening to become a cash cow based on the current trendline.  That raises a question in my mind what they will do with the cash they would be expected to start piling up in H2?

 

Their relevant website is not the one listed by the TSX.  It is http://www.macroenterprises.ca. They have another website which is more customer oriented, but devoid of investor related information.

 

[bz1516]

Here is an article in the Financial Post which discusses current growth in the pipeline construction market and how it will grow through 2020.

 

http://business.financialpost.com/2013/11/21/canada-in-midst-of-great-energy-infrastructure-super-cycle/?__lsa=3aa7-b715

[samiamdj]

First post vanished.  So when at first you don't succeed try.,try again. This is my leap of faith.

 

IMHO Macro could represent the consummate long term investment. Whether they choose to take advantage of what will be a long in duration pipeline build out in BC, by growing organically or being acquisitive, or both, their ability to throw off lots of cash will keep increasing.

 

It seems perfectly reasonable to assume that there will be as much business as they can handle. Especially with the public and govt scrutiny of pipelines. Macro's monitoring business should grow materially. Services as well.I would think, although it's pretty much a guesstimate on my part, that this is a field that they can ramp up more easily. Needing trained staff and monitoring equipment for the most part. An acquisition would be great but I'm no so sure that they can't handle what comes their way inhouse .

 

At some point Macro is going to have to decide what to do with their ever increasing free cash flow. Hoarding it makes no sense. So they either put it to work by acquiring other sector businesses, please don't go beyond your area of expertise as you've got a ton of growth a head of you by just being you, or implementing a dividend. They could pay a sizable dividend and still have a lot of free cash left over for acquisitions, debt mgmt and fiscal prudence.

 

To me Macro is a company with great potential, thus leading to a successful and rewarding investment that could be held perhaps in perpetuity.

 

One mans opinion

 

Best,

 

Sam

[samiamdj]

Another great quarter, but their earnings were obviously impacted by the mix of their projects. Top line was great but bottom line was a little light based on Q3 revenues. I had expected their bottom line to be better YOY. Again I'm not unhappy with their earnings but based on the revenue jump earnings didn't follow in lock step.

 

The company somewhat contradicts itself in this part of their outlook for Q4. Although the outlook is probably based on the fact that they're 2/3rds of the way into Q4.  Or perhaps more muted expectations in the under promise/over deliver philosophy. On one hand they see that Q4 to be somewhat above Q4 of last year, while in the same paragraph Macro sees prospects of significant pipeline infrastructure projects in BC. One would expect with those current prospects that Q4 would be materially better?

 

<The Company is expecting revenues in the fourth quarter to be somewhat above that recorded in the fourth quarter last year, after taking into account the expected additional revenues resulting from the November 2012 acquisition. The Company continues to actively bid new jobs and look for new opportunities. The Company is encouraged by the prospect of significant pipeline infrastructure projects in B.C. and Alberta in the short and medium term>

 

Bottom line is the big prize is BC's LNG initiative. The company highlights it and any investor in this sector knows that this has huge potential. A few years from now Macro's current earnings will most likely pale in comparison to 2015/2106.

 

Thoughts?

 

Best,

 

Sam

 

[samiamdj]

Also why the jump in shares? Options?

 

Macro went from 25,120 to 26,663.  A decent size Q over Q jump without being acquisition related. Question for Frank?

 

Sam

 

[samiamdj]

Thanks 50cent.

 

Must of been expiring options. Talk about having skin in the game.

 

At some point Macro is going to have to make a decision as to what to do with all of the cash they're throwing off. Especially making all cash acquisitions.

 

Will Macro just continue to be on the hunt for additional scale bolt on acquisitions? I wonder how many potential acquisition candidates there are where they can use their cash. At some point they will have to look for larger fish, which could necessitate using stock and cash. Also it wouldn't surprise me to see someone try to swallow them up. But with Frank's huge ownership he'll have to be on board.

 

In a couple of years they'll be quite a bit larger and in a position to move to the big board and easily pay a dividend. I suspect that the Macro of today won't look anything like the Macro of 2016. Which bodes very well for those of us who are committed and have patience.

 

Best,

 

Sam

[Guest 50centdollars]

Thanks 50cent.

 

Must of been expiring options. Talk about having skin in the game.

 

At some point Macro is going to have to make a decision as to what to do with all of the cash they're throwing off. Especially making all cash acquisitions.

 

Will Macro just continue to be on the hunt for additional scale bolt on acquisitions? I wonder how many potential acquisition candidates there are where they can use their cash. At some point they will have to look for larger fish, which could necessitate using stock and cash. Also it wouldn't surprise me to see someone try to swallow them up. But with Frank's huge ownership he'll have to be on board.

 

In a couple of years they'll be quite a bit larger and in a position to move to the big board and easily pay a dividend. I suspect that the Macro of today won't look anything like the Macro of 2016. Which bodes very well for those of us who are committed and have patience.

 

Best,

 

Sam

 

They have $43 million in retained earnings. They could easily pay a dividend. I doubt they will though. I think they will probably make an acquisition. If the LNG boom takes off, MCR may become quite big. I do think its difficult to put a multiple on MCR as revenues are cyclical . Also, it is growing quickly but from what I've heard, management will not speak with analysts or the street. They just want to run their business. Thats ok with me though.

[samiamdj]

Yes over the years I've had my fill of CEO's who spent their time in promotion mode with little focus on what counts; business. The results speak for themselves. I think Dick Guesella of Connacher was the defacto king of promotion. A pr machine. Did Connacher ever become a household name?

 

Best,

 

Sam

[PJM]

MCR ranked as TSX Venture top 50 companies among 2100 companies

 

http://online.wsj.com/article/PR-CO-20140212-911126.html

[PJM]

Good set of results for 2013 and positive outlook for the next quarter. Still trading less than 7 P/E on a fully diluted basis.

 

http://www.macroenterprises.ca/documents/press_releases/2014/MCR-2014-03-12.pdf

[Guest 50centdollars]

Good set of results for 2013 and positive outlook for the next quarter. Still trading less than 7 P/E on a fully diluted basis.

 

http://www.macroenterprises.ca/documents/press_releases/2014/MCR-2014-03-12.pdf

 

Good results. They are guiding to higer Q1 revenues but lower profit margins. I'm curious to see what the market reaction is going to be to these results. Also, management is hosting its first conference call today. Wondering if they will start promoting the compnay now?

[bz1516]

Good set of results for 2013 and positive outlook for the next quarter. Still trading less than 7 P/E on a fully diluted basis.

 

http://www.macroenterprises.ca/documents/press_releases/2014/MCR-2014-03-12.pdf

 

Good results. They are guiding to higer Q1 revenues but lower profit margins. I'm curious to see what the market reaction is going to be to these results. Also, management is hosting its first conference call today. Wondering if they will start promoting the compnay now?

 

I'm a little disappointed with the results.  Lower margins on higher revenues may balance out, but with more shares o/s looks like earnings will be down more than in Q4 before Q4 was normalized.

 

I have a doctors appointment at the time of the call so if anyone listens would like to hear as I have a feeling there will be no replay.

[Guest 50centdollars]

Good set of results for 2013 and positive outlook for the next quarter. Still trading less than 7 P/E on a fully diluted basis.

 

http://www.macroenterprises.ca/documents/press_releases/2014/MCR-2014-03-12.pdf

 

Good results. They are guiding to higer Q1 revenues but lower profit margins. I'm curious to see what the market reaction is going to be to these results. Also, management is hosting its first conference call today. Wondering if they will start promoting the compnay now?

 

I'm a little disappointed with the results.  Lower margins on higher revenues may balance out, but with more shares o/s looks like earnings will be down more than in Q4 before Q4 was normalized.

 

I have a doctors appointment at the time of the call so if anyone listens would like to hear as I have a feeling there will be no replay.

 

Yeah I hear you. I was only able to listen to the call for about 20 mins. All the questions I heard were about margins. They expect margins to be between 20 -30% going forward with 25% being average. They said that margins were down due to strategic moves to win new customers with initial work at lower margins and most of that work would be done in the next few weeks.

 

Frank also said that they are biding on LNG projects. He said he thinks they can add around $70 million in more work with existing resources. From what I heard, they sounded upbeat to me.

 

One think that seems fishy to me is that the management team wouldn't talk to anybody in the last 2 years as the stock went from $0.25 to $7. Now all of a sudden they host a conference call and are willing to talk to analysts and the street. Why is that? Is it because the party is over and promoting starts? Seems fishy to me.

[PJM]

I think the management is upbeat but they want to keep expectations low. They are not trying to bid aggressively & accept lower margins not just to win any contracts, but to penetrate into some strategic, larger clients. They don't expect margins to go down for existing clients. Interestingly enough Frank said that the landscape is becoming less competitive, which means they should continue to have some pricing power.

 

They do expect revenues to grow, so if revenues grew at 25% and PBT margins went down to 15%, they would still be able to generate same EPS.

 

I've no comments on why they have now started to speak to analyst. I guess with the firm growing they probably want to have some media behind it.

[Guest 50centdollars]

I think the management is upbeat but they want to keep expectations low. They are not trying to bid aggressively & accept lower margins not just to win any contracts, but to penetrate into some strategic, larger clients. They don't expect margins to go down for existing clients. Interestingly enough Frank said that the landscape is becoming less competitive, which means they should continue to have some pricing power.

 

They do expect revenues to grow, so if revenues grew at 25% and PBT margins went down to 15%, they would still be able to generate same EPS.

 

I've no comments on why they have now started to speak to analyst. I guess with the firm growing they probably want to have some media behind it.

 

Ya I think if it works out it will be a good strategy. The market obviously doesn't like like it right now. Does anyone know whats the proper metric to use when valuing a company such as MCR? I dont think you can use P/E ratio because earnings can be lumpy depending on when contracts start and end. EV/Ebitda? Cash flow? Any thoughts?

[bz1516]

I think the management is upbeat but they want to keep expectations low. They are not trying to bid aggressively & accept lower margins not just to win any contracts, but to penetrate into some strategic, larger clients. They don't expect margins to go down for existing clients. Interestingly enough Frank said that the landscape is becoming less competitive, which means they should continue to have some pricing power.

 

They do expect revenues to grow, so if revenues grew at 25% and PBT margins went down to 15%, they would still be able to generate same EPS.

 

I've no comments on why they have now started to speak to analyst. I guess with the firm growing they probably want to have some media behind it.

 

Ya I think if it works out it will be a good strategy. The market obviously doesn't like like it right now. Does anyone know whats the proper metric to use when valuing a company such as MCR? I dont think you can use P/E ratio because earnings can be lumpy depending on when contracts start and end. EV/Ebitda? Cash flow? Any thoughts?

 

I use PE ratio, just because its easy.  Price/FCF is ok, but I like the version of FCF that subtracts maintenance capex and not sure if MCR even has that number or if it would be better than the PE ratio?

 

 

[PJM]

I'd still use PE even though earnings may be lumpy quarter by quarter. In case of MCR working capital is more lumpy because it is a factor of number of projects they are working on, so cash flows/FCF will be volatile as well. It is not capex heavy business, so i'd not look at EBITDA as a metric.

[Andy Dufresne]

Lots and lots of warning signs:

 

1. Company has a negative cash position of 3.3 million - down 21 million in a single quarter (!) due to the

2. Ballooning of receivables from a steady 41 million (from end of 2012 and 2013) to more than double at 89 million, and I suspect the credit risk has gotten worse [cf. the already deteriorating situation of the receivables in Note 15 of the Q4 2013 report (p. 28 )]; also payables doubled from 22 to 44 million  ... and this is on the back of extremely

3. "Suspect" growth - income up 45% QoQ but at what cost?

4. Management being callous at best and dishonest at worst with their "explanation" that they had a large contract on which they lost money:

 

"EBITDA and net income were lower than anticipated primarily as a result

      of a loss on one particular pipeline construction project in the Fort

      McMurray region. For strategic reasons this project was originally bid at

      lower than normal margins but the resulting loss was unexpected."

see the press release here - http://online.wsj.com/article/PR-CO-20140528-912093.html

 

Anytime I hear that losing money is a STRATEGIC decision I have significant doubts about the ability and/or honesty of management (and I am well aware that the CEO owns 30% of the company)

 

Sadly, even this we can only gather from the press release because as of now the link to the Q1 2014 MD&A sends you to the Q1 2013 MD&A ....

[Patmo]

Without doing too much digging, valuation looks very attractive on this company right now. Normalized P/E is something around 4, pretty nuts for a company whose biggest blimp is one relatively crappy quarter.

 

The company did not have low margins only because of aggressive project bidding. It lost $7mil on one project because of "unanticipated problems", ON TOP of the aggressive bidding. Operating income would have been $10mil instead of $3mil, for a operating margin of 11%. Not great, but reasonable considering the strategic considerations.

 

As for AR, $60mil is a month old or less so I'm not too worried since the majority is obviously from those big projects. What worries me a little is that close to 90% of AR is owed by only 3 customers. I guess that's inevitable when doing large projects in this kind of business.

 

At first glance this looks like an extremely easy buy. Is there any underlying issue I'm missing that anyone is willing to share?

[jouni1]

the issue that has kept me from buying is the low valuation and the .V at the end. seems too good to be true :D having said that, everytime this thread pops back up i feel like i should buy a bit. maybe i will  ;D would love to hear a proper bear case for this.

[Guest 50centdollars]

 

One issue for me is management. I don't really know what to think of their strategy. They took on a contract with no margin to get future business. I hope that strategy works out but who knows if it will. I bought shares at $1.36 and have never averaged up. I think if LNG is a go, this stock is a buy. I know very smart hedge fund managers who own this stock. I can't say who they are but if I told you their names you would instantly know who they are.

[Patmo]

Here's a VIC-style writeup I did for fun on this company. Price per share is slightly cheaper than ratios in the writeup.

 

 

 

 

MCR.TO is a construction services provider (pipeline and facilities construction and maintenance) operating in western Canada, primarily in the Fort McMurray area. Attractive growth opportunity as the company is in talks with various British Columbia LNG projects. Management reports contracts are attractive in both their pricing and structure.

 

The company trades at trailing twelve months 6.6 P/E and EV/EBITDA 4. The company crapped the bed last quarter on gross margins and operating cash flows. The market appears to believe in a permanent impairment to margins due to increased competitive pressure driving the latest big job's prices down. I believe results to be due to the company accepting a fixed price contract which turned sour. Contract was priced at reasonable margins, which were killed by issues that prolonged the project (as with most every construction project). Healthy margins should resume for the most part starting next quarter. Adjusting for fixed contract job, ttm P/E is a little over 4 and EV/EBITDA around 3.3.

 

Fort McMurray's activities are picking up steam. Near term (2-3 years out) looks bright, which management echoes. Anecdotal evidence is that friends from eastern Canada are starting to move in the area to work, a replay of the very early stages the last boom. Leaving aside attractive potential growth in LNG projects, the company appears likely to at least maintain revenue and NI going for the next 2-3 years.

 

Pure play comps difficult to find as competition appears privately owned. A screen for construction services companies with >$20mil revenue  in Canada shows the next cheapest company to be P/E 10. Cut that to 8 to be safe, still a buck for 50 cents. Optional LNG play comes free. Best case scenario, company keeps growing healthily, market gains enough confidence to assign a P/E of 15 or more, resulting in multibagger.

 

Top brass is properly incentivized. Eg. CEO owns 30% of shares (36% including convertible preferred). CEO is clearly not a hollywood type of leader; gives honest answers, nothing more, nothing less.

 

Management is also very experienced, which shows in recent years' results. Return on average equity increased from 32% in 2011 to a mindboggling 53% in 2013, despite lower leverage (2011 DuPont equity multiplier is 2.224 vs 1.9 in 2013). I doubt either value can be sustained long term, but still a very encouraging indication of management's abilities.

 

Downside risk includes a concentrated customer base. Permanent loss of 1 or 2 clients could impact results significantly, which is somewhat offset by flexibility inherent in business (can leverage skills in multiple energy sectors). Increased competition as FortMac heats up could actually bring pricing power down. Relatively few assets to act as safety net in catastrophe-case scenario (around $1ps current assets net of all liabilities, and $1.5 book PPE, before applying any discounts.)

 

 

Main catalyst is time, gradual increase of market's confidence in the company as quarterly results roll by. LNG project agreements would be a catalyst as well. Graduation to the main TSX index from its sister venture exchange could put the company in the spotlight. Also, highly unlikely in the short term, but possible commencement of dividend distribution.

 

In summary, here are the main ingredients that make Macro an attractive investment:

-Flexible business that can play into multiple energy sectors (free option on LNG)

-Company showed outstanding results in the past

-Top brass is properly incentivized

-Heavily discounted share price due to temporary issue

-Positive short-term outlook for the industry

[jwfm1985]

Anyone else jumping in at these prices? Management has moved away from large fixed price contracts (which bit them in the a*s Q1) to time and material. This should smooth out earnings going forward without the risk of big, miss-priced contracts. Trading at 4.2, 4.2 and 2.9x the TTM, '14E and '15 EBITDA respectively. Most comps in the space around 5.5x EBITDA and quite a few catalysts over the next year. This is one of my favourites right now...

[Patmo]

Next quarterly results might be pretty bad too, potentially giving an even better entry point. There will be remnants of that big crappy job ($4mil IIRC) at 0 margin, and top line will be weak due to customer projects' timing, as per outlook. In the end I bought about $4.5 on average which I'm quite comfortable with.

 

I'm curious what companies you used to compare. I found nothing that was even similar except one private company (incidentally direct competitors to Macro lol). Care to share?

[jwfm1985]

Next quarterly results might be pretty bad too, potentially giving an even better entry point. There will be remnants of that big crappy job ($4mil IIRC) at 0 margin, and top line will be weak due to customer projects' timing, as per outlook. In the end I bought about $4.5 on average which I'm quite comfortable with.

 

I'm curious what companies you used to compare. I found nothing that was even similar except one private company (incidentally direct competitors to Macro lol). Care to share?

 

That could go both ways though. Management lowered the expectations pretty clearly last Q, so any positive news could move the stock. I seem to remember them saying they were taking the brunt of the cost of that contract in Q1 as well. We'll see... My avg cost is 4.50 as well.

 

As for comps, tough to find perfect examples because these guys are such a niche player, but the most relevant comparisons would be in the North American construction space, i.e. Bird, Aecon, North American Energy Partners (most similar to MCR), Stuart Olsen, Granite, Dycom, etc.  Obviously all of the above have a higher margin of safety just by nature of size with much more revenue diversification and less reliance on large projects like MCR, but they all also have significantly lower EBITDA margins.  FY14 multiple for the group, depending on who you include, is well above 5.5x

 

One more thing: there is a lot of consolidation in the construction space, and a niche player like MCR would be an attractive target for one of the bigger players who are trying to get into higher margin, energy focused projects...