Ready to fly in 2022
Investment recommendation
We are reiterating our BUY rating and one-year target price of C$13.00 on Bird Construction, our top pick. The stock performed well in 2021, increasing 21% YTD compared to the 17% YTD increase in the S&P/TSX Industrials Index, and we see further outperformance in 2022. Bird boasts compelling revenue visibility through its record backlog and enjoys improved margins through more consistent execution and
a more diversified work program. Moreover, we believe the company is well positioned to deliver a host of environmentally friendly building solutions, such as mass timber and modular building, that should be increasingly in demand over the coming years. We think additional reasons to like the stock here include its 4.0% dividend yield, solid balance sheet, and strong management team.
Investment Highlights
The "new Bird" boasts higher margins on more diverse and lower-risk revenues. Bird has enhanced its margin profile on improved execution, a more balanced work program, and synergies from the Stuart Olson acquisition. Bird's TTM revenue is up 59% y/y with the proportion of it coming from lower-risk contracts,
such as IPD, increased to 41% YTD from 25% YTD through Q3/2020. At the same time, TTM EBITDA margins of 3.6% (5.5% incl. CEWS) compared with 3.8% and 2.1% through Q3/2020 and Q3/2019, respectively. While Stuart Olson significantly increased Bird's scope and scale, Dagmar further diversifies it through access to the Ontario civil infrastructure market and self-perform work on complex projects, which should further boost margins. All told, we believe the combined entity is better positioned than ever to benefit from over $350 billion expected in government expenditures in infrastructure and the strong commodity price environment.
Bird's record backlog provides enhanced revenue visibility. So far in Q4/2021, Bird has announced five contract wins for more than $500 million combined, which we believe will drive bookings of ~$900 million and backlog to a new record of $3.1 billion by the end of 2021. Even if we exclude backlog acquired with Stuart Olson, backlog would be ~$2.1 million, well above the prior record of $1.8 billion in 2015. This backlog supports our 12% revenue increase forecast for 2022—including a full-year of Dagmar— which combined with solid margins should drive EPS growth of 42% y/y to $0.98.
Longer term, Bird is positioned to participate in several sustainable building trends. These include modular construction (through Bird's 50% interest in Stack Modular), mass timber, innovative trenching solutions, and smart building through virtual design construction and its Centre for Building Performance. These service offerings are well suited to meet the needs of clients who are increasingly seeking environmentally friendly building solutions. For example, modular construction reduces waste and delivers an energy-efficient product, mass timber makes use of a renewable material and boasts a $1 billion opportunity set in Canada, and innovative trenching is 20x faster than conventional excavation, thereby reducing emissions.
Bird boasts the financial flexibility needed to continue pursuing organic and inorganic growth opportunities. At the end of Q3/2021, Bird's net debt sat at just $10 million, despite closing the $32 million acquisition of Dagmar on September 1, 2021. The company has liquidity of $210 million.
Valuation
Bird trades at 10x our 2022 EPS estimate, materially behind the North American group at 18x and its 10-year average of 14x. Given the 42% EPS growth we forecast in 2022 for Bird is in line with the group, we feel the stock shouldn't trade
at such a discount. We conservatively seta multiple of 12x on our 2023 EPS estimate to derive our C$13.00 target, which implies a 38% total return.