(*All dollar amounts quoted are in CAD)
This week’s bond review highlights a construction equipment rental company focused in Western Canada. WesternOne provides equipment rental services to construction companies in the commercial, residential and infrastructure industries as well as niche markets such as television and movie production and shipbuilding. The company recently released its quarterly results for the three months ending March 31, 2018, with outstanding increases in several of its financial metrics.
- Revenues increased by 31.9% year-over-year.
- Adjusted EBITDA was up 63.6% over Q1 2017.
- Gross Profits increased by 36.4%.
- Margins also increased with gross margin increasing from 41% a year ago to 42.4% in Q1, and adjusted EBITDA margin growing from 23.6% a year ago to 29.3%.
- Q1 interest coverage was a whopping 3.4x.
Canada’s western provinces (British Columbia and Alberta), where WesternOne’s operations are focused, are slated to lead the nation in economic growth this year. Along with that, construction activity is increasing in Vancouver and Victoria (British Columbia) as well as in Calgary and Edmonton (Alberta). WesternOne has an excellent opportunity to increase its revenues as economic and construction activity increase this year in its primary markets. WesternOne has had consecutive quarters of growth since Q3 of last year. The company’s 2020 convertible bonds, couponed at 6.25%, are currently discounted, giving them a yield-to-maturity of about 9.50%. Given the company’s recent strong quarterly results, these 2020 convertible bonds would make an ideal addition to Durig Capital’s Fixed Income 2 (FX2) Managed Income Portfolio, the most recent performance of which is displayed below.
Outstanding First Quarter 2018 Results
WesternOne recently released its results for the three months ending March 31, 2018. The company showed many areas of improvement year-over-year. Here are some of the highlights from Q1.
- Consolidated revenues were up 31.9% to $34.3 million, from $26.0 million in Q1 2017.
- Gross Profit for Q1 was $14.6 million, up from $10.7 million a year earlier, an increase of 36.4%.
- Along with gross profit, gross margin also increased, up to 42.4% from 41% a year earlier.
- Adjusted EBITDA also increased handsomely as compared to Q1 2017, up by 63.6% to $10.0 million from $6.1 million.
- Adjusted EBITDA margin increased to 29.3%, compared to 23.6% in Q1 2017.
In addition to the year-over-year increases recorded in Q1, WesternOne also has also posted excellent trailing twelve month revenues and adjusted EBITDA. As of March 31, 2018, the company has trailing twelve month revenues of $87.9 million which is 15.3 million or 21% higher than the prior comparative period. Also, trailing twelve month adjusted EBITDA is currently at $11.7 million, $3.8 million or 48% higher than the comparative period.
About the Issuer
WesternOne is headquartered in Vancouver, British Columbia, Canada, and seeks to acquire and grow businesses in the construction and infrastructure services sectors in Western Canada. The company’s principal business platform is WesternOne Infrastructure Services (WIS). WIS is a leading provider of construction heat services and aerial equipment rentals to businesses in the construction, infrastructure, film and television industries in Western Canada. WIS has 13 locations in BC, Alberta and Manitoba. As of March 31, 2018, the company employed approximately 360 employees in Western Canada.
Approximately one year ago, WesternOne closed on the sale of a significant portion of the assets from its Britco LP subsidiary. This included its modular space rental business (Britco Rentals) and its majority interest in Britco’s modular building manufacturing operations in the United States (Britco USA). The transaction, valued at approximately $45.1 million, gave WesternOne financial flexibility to reduce debt and make capital investments into its core WIS division (WesternOne Infrastructure Services).
Since divesting its interest in Britco, WesternOne has built solid momentum over the past three quarters. Third and fourth quarter 2017, as well as first quarter 2018 has shown steady increases in total revenue as well as adjusted EBITDA.
Peter Blake, CEO of WesternOne commented on the company’s upward momentum in the company’s recent first quarter press release. “We are encouraged with the continued signs of gradual economic growth in the Western Canadian markets as we execute our business strategy to enhance capital returns through managing revenue growth, redeploying fleet within branches and leveraging our WEDGE remote monitoring technology.”
Western Canada Poised for Economic Growth
Recently, the Conference Board of Canada released its Provincial Outlook: Winter 2018. In this report, the Board stated that the two Western Canadian provinces (British Columbia and Alberta) will show the strongest economic growth this year. British Columbia (BC) is slated to lead the pack, with its economy predicted to grow by 3.1% this year. Vancouver BC is a current hotspot for construction, propelled by a hot real estate market.
Thanks to rising oil production and an increase in drilling, Alberta’s 2017 growth surged ahead of all other provinces with a real GDP growth rate of 6.7%. For 2018, this growth will be moderate, predicted at 2.8%, but still amongst the leaders in provincial growth. Calgary Alberta, one of Canada’s largest cities is also slated to experience healthy growth. As Alberta seeks to diversify its economy (in addition to oil), other industries are moving in, many of them making Calgary their headquarters. This has given the construction industry (which WesternOne is heavily involved in) a lift. As more jobs are created, more people relocate, and they need not only housing, but also the retail outlets, and infrastructure that goes along with supporting an increasing population.
Finally, LNG Canada has recently indicated that conditions are aligning to start building a liquefied natural gas project in British Columbia. LNG Canada, a consortium which is 50% owned by Royal Dutch Shell, has been making steady progress to construct an export terminal in Kitimat, British Columbia. Last month, LNG Canada selected an engineering joint venture based in the U.S. and Japan as the prime contractor for the project. LNG Canada forecasts that it will cost up to $40 billion to construct the Kitimat terminal and related infrastructure. This project would be a natural fit for WesternOne’s services and could provide significant revenues.
Interest Coverage and Liquidity
Interest coverage is of paramount importance to bondholders as it reveals the company’s ability to service its existing level of debt. Based on this, bondholders of WesternOne’s 2020 convertible bonds should be pleased. For its most recent quarterly results (three months ending March 31, 2018), WesternOne had operating income of $4.1 million and interest expense of $1.2 million. This calculates to an interest coverage ratio of 3.4x. This is an excellent ratio, especially considering the bonds currently discounted price and very competitive yield-to-maturity.
Liquidity measures a company’s ability to cover its day to day operational expenses. As of March 31, 2018, WesternOne had total liquidity of $14.7 million. This was comprised of $4.8 million in cash and $9.9 million of unused credit on its ABL Facility.
The risk for bondholders is directly related to WesternOne’s ability to continue to build on the momentum it has established in the last three quarters as well as its ability to capitalize on Western Canada’s current economic growth. With the sale of its Britco subsidiary last year, the company is now focused on its core business – WesternOne Insfrastructure Services (WIS). The company has strung together consecutive quarters of revenue and adjusted EBITDA growth. And with Canada’s economy on a healthy growth track, WesternOne should have ample opportunities to participate in that growth. With these positive developments, the 9.5% yield-to-maturity on the company’s 2020 convertible bonds does appear to outweigh the risks identified.
WesternOne’s business is seasonal, in that its WIS aerial and general construction equipment rental business is generally lower from January through March as construction activity is lower during the winter season. From April through July, the rental demand for aerial and construction equipment accelerates and demand continues to November as companies strive to meet construction targets prior to the holiday season.
Summary and Conclusion
WesternOne has done a fantastic job of stringing together successive quarters of growth. The company operates in Canada’s fastest growing economies – British Columbia and Alberta. Construction activity is increasing in both provinces and WesternOne has a solid opportunity to profit from this growth, especially as construction activity ramps up in in the second and third quarters. Income investors should take note, especially given the company’s excellent 3.4x interest coverage and its 2020 bond currently selling at a discount. Considering the competitive 9.5% yield-to-maturity on these convertible bonds, they make an ideal addition to Durig Capital’s FX2 managed income portfolio.
Issuer: WesternOne Inc.
Price: $1.67 (CAD as of 5/15/2018)
Conversion Price: $11.82/share
Ratings: – / –
Yield to Maturity: ~9.50%
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Durig Capital provides investors with a specialized, transparent fiduciary service at a very low cost. Our FX2 (Discretionary Management) Portfolio over time has greatly outperformed our FX1 (Non-discretionary) Portfolio, giving significantly higher (at times double) the returns of FX1. Our professional service enables access to a broad spectrum of bond, high yields, and lower price points that are often found in less efficient markets, but not evidenced in many bond services.
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Disclosure: Durig Capital and certain clients may hold positions in WesternOne’s June 2020 bonds.
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