This week, we look to our neighbors to the North to review a company involved in several of Canada’s largest infrastructure projects. IBI Group Inc. (IBIBF) is a globally integrated architecture, planning, and engineering firm. The company has issued a 6% couponed convertible, Canadian-dollar denominated debenture that matures June 2018. Its recently released financial results revealed some exciting developments:
Q4 Adjusted EBITDA increased 84% year-over-year.
2015 Adjusted EBITDA increased 45.1% over 2014.
Adjusted EBITDA margins increased for both Q4 and 2015. For 2015, margins increased to 10.5% from 8.0% in 2014.
Along with its credit facility refinance, the company established a sinking fund which will cover over approximately 60% the outstanding balance of these bonds upon maturity.
2016 revenue guidance is projected to be $355 million, an 8.5% increase over 2015 levels.
IBI Group has $365 million in committed, contracted work for the next 3 years.
In addition to these outstanding financial results, IBI Group is the co-leader in a consortium that is constructing the current, largest infrastructure project in Canada, the Eglinton Light Rail project, valued at $9.1 billion. With its increasing revenues, EBITDA and margins, along with its projected increasing revenues for 2016, we have marked these attractive 12% yielding loonie bonds for addition to ourFX2 and FX3 managed income portfolios.
Excellent Q4 and Full Year Results
IBI Group recently posted impressive Q4 and full year 2015 results, showcasing increasing revenues, adjusted EBITDA as well as increasing margins. For Q4 2015, revenues increased year-over-year by 13.2%, growing from $75.0 million in Q4 2014 to $84.9 million in Q4 2015. For the full year 2015, revenues also increased by 9.7%, growing from $298.3 million in 2014 to $327.1 million in 2015. The company also boasted outstanding adjusted EBITDA growth, with Q4 year-over-year growth increasing by a whopping 84% to $8.3 million. Full year 2015 adjusted EBITDA had a similar impressive increase of 45.1%, growing from $23.7 million in 2014 to $34.4 million in 2015. Adjusted EBITDA margins also increased both in Q4 and full year results. For Q4, adjusted EBITDA margins increased year-over-year from 6.0% in Q4 2014 to 9.7% in Q4 2015. Full year adjusted EBITDA margins also increased to 10.5% from 8.0% in 2014.
As part of its Q4 and 2015 results, IBI Group also revealed its 2016 revenue guidance of $355 million, which represents an 8% revenue increase from 2015. Most of this growth is expected to be organic growth from current projects with small amount coming from the gain on foreign exchange rates between the CAD and USD. The company also has $365 million in committed, contracted work over the next three years and approximately 11 months of backlog.
In October 2015, when IBI Group refinanced its credit facility, it also established a sinking fund, along with a schedule of deposits between December 2015 and June 2018. All totaled, the deposits will accumulate to $34.5 million which the company has indicated can be used toward its credit facility or to help pay off these 2018 6.0% Convertible Debentures. With a current balance of $57.5 million, the sinking fund would cover approximately 60% of the outstanding balance of these notes.
About the Issuer
IBI Group is a Canadian-based, globally integrated architecture, planning, engineering, and technology firm. It’s beginnings date back to 1974 when nine partners set out to provide professional services for planning and design for urban development and transportation. From the initial two offices in Toronto and Vancouver, IBI Group now has 62 offices in North America, Europe, Asia and the Middle East, with more than 2,400 employees. In 2000, IBI embarked on a program of strategic growth through acquisitions. In 2004, the firm went public with the formation of the IBI Income Fund. The Fund was converted to a corporation – IBI Group Inc. – at the end of 2010.
From high-rises to industrial buildings, schools to state-of-the-art hospitals, transit stations to highways, airports to toll systems, bike lanes to parks, IBI Group designs every aspect of a truly integrated city for people to live, work, and play. The company organizes its expertise into three sectors: Intelligence, Buildings and Infrastructure. The Intelligence sector includes systems designs and software development. The Buildings sector involves not only building architecture, but interior design and building engineering (mechanical, structural and electrical). Finally, the company’s Infrastructure segment includes urban planning and design, landscape architecture, transportation and civil engineering.
IBI Group’s Major Canadian Projects
IBI is involved in some of Canada’s biggest infrastructure projects. In fact, ReNew Canada, a Canadian infrastructure periodical, annually rates the largest infrastructure projects (based on the dollar value of the project) in Canada. For 2016, their Top 100 list contained nine projects of which IBI Group is a major contributor. Of the Top Ten on that list, IBI Group is involved in three of the top ten on that list – Eglinton Crosstown Light Rail Transit (valued at $9.1 billion), Green Line Light Rail Transit (valued at $4.5 billion) and New Champlain Bridge Corridor Project (valued at $4.2 billion).
The Eglinton Crosstown Light Rail project is currently the largest infrastructure project in Canada. In July 2015, IBI Group, acting as the co-lead for the Crosslinx Transit Solutions Consortium, was awarded the design, build, maintenance and finance of the project. The province of Ontario will invest $5.3 billion for capital costs of this 19 kilometer light rail transit project which will also contain 25 stations and stops.
Growth in Infrastructure
The global economy relies on the backbone of capital projects and infrastructure that allows businesses and people to produce goods, manage data, and move commerce around the world. A recent report by PwC (Price Waterhouse Coopers), predicts that the global capital projects and infrastructure market will be worth over $9 trillion per year (USD) by 2025, up from $4 trillion in 2012. Not surprisingly, the majority of this growth is expected to come from emerging economies. Also, a substantial geographical shift in infrastructure spending is already under way with the emerging economies of Asia’s share of global infrastructure spending set to increase from its 2012 level of 30%, to 40% in 2018, and 48% by 2025. IBI Group is investing in this infrastructure shift. For the past decade, the company has worked extensively on infrastructure projects in India. India’s rapid urbanization has presented many opportunities for IBI Group to work with regional and national governments to design and implement projects mainly in the area of transportation.
These 6.0% couponed Loonie bonds are convertible to IBI Group common shares at a conversion price of $21.00 / share. IBI shares have shown a recent rally, up from their 2016 low in early January of $2.07 / share to their current trading level around $3.86 / share, an impressive increase of over 86%.
In addition to IBI Group’s excellent Q4 and 2015 financial results, the company has made recent improvements in its balance sheet. In late 2015, it repaid its 5.75% convertible debentures for $20.0 million.
IBI Group’s 2015 operating income was $38.995 million, with an interest expense of $21.792 million. This calculates to an interest coverage of 1.78x. While this interest coverage is on the low side as compared to some of the recent bond reviews on the Bond-Yields.com blog, IBI Group’s increasing margins as well as its increased guidance for 2016 revenue should provide more than adequate coverage for bondholders.
As of 12/31/2015, IBI Group had available cash of approximately $8 million ($7.968 million). In addition, it has approximately $15 million available on its current credit facility.
The default risk is IBI Group’s ability to perform. The company just posted fantastic Q4 and full year 2015 results. It’s revenues, adjusted EBITDA and margins are improving. IBI is co-leading the development of the largest, current infrastructure project in Canada that is valued at over $9 billion. In addition, the sinking fund established in late 2015 can provide the majority of the funds needed to retire these bonds when they mature in June 2018. Considering all of these factors, and its convertibility option, it appears that the over 12% yields on these short 25-month bonds significantly outweighs any default risk that we can identify.
There is also an inherent currency risk in bonds denominated in other than US dollars. However, in the case of the Canadian dollar, we think this risk is minimal relative to the high yield this issue offers. Canada has the eleventh-largest economy in the world and is one of the world’s wealthiest nations.
Summary and Conclusion
IBI Group increased its revenue, adjusted EBITDA and margins in 2015. It is a major player in some of the largest infrastructure projects currently underway in Canada, as well as increasing its presence in growing infrastructure markets such as India. It has $365 million in committed, contracted work over the next three years, as well as 11 months of backlog. The company’s dominant presence in its home country coupled with its international presence in established as well as developing markets will continue to provide growth opportunities as infrastructure spending increases. These 26-month convertible bonds, provide diversification into the infrastructure sector as well as yields that are more than 15x the current U.S. Treasury yield. Considering IBI’s projection for increased 2016 revenues along with its increasing profitability, we have marked these convertivble loonie debentures for addition to our Fised-Income2.com, Fixed-Income3.com high yield global fixed income portfolios.
Issuer: IBI Group Inc.
Ticker: IBG (TSX Exchange) / Stock Price: $3.90 (CAD)
Bond Coupon: 6.00%
Conversion Option Price: $21.00 CAD
Yield to Maturity: ~12.17%
(unless indicated, all figures in this article are in Canadian dollars)
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Disclosure: Durig Capital and certain clients may have positions in IBI Group’s 2018 Convertible Debentures.
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