A Canadian Small-Cap Play That Can Do It AllA Canadian Small-Cap Play That Can Do It All
By Jim Nelson
October 24, 2007
We have written to you so much about how big the coming U.S. infrastructure boom will be your eyes are probably sore. Between occasional guest editor, Chris Mayer, your Friday special, Christopher Hancock and yours truly, we have given you the stats to prove how big this is going to be ($1.6 trillion in total expected costs, 90% of highways to be exceeding capacity in less than 13 years, etc.). We have even given you a few small-cap opportunities in this area.
But this infrastructure theme isn’t going away anytime soon. The American Association of State Highway and Transportation Officials expects the upgrades and repairs to take at least another 20 years as a conservative estimate… Not to mention the maintenance associated with such projects.
So, before I get ahead of myself, let’s take a look at a few companies we’ve discussed so far this year:
Way back in February, Chris Mayer told you about a unique water play, Pioneer Companies, Inc. (PONR: NASDAQ). This company is the sixth-largest producer of chlor-alkali products in the U.S. Chlor-alkali is important to the process of water treatment. And since the company is the only one located in Southwest U.S. and the water infrastructure is so bad there, Chris expected big things from the company. Well, sure enough, he was right. At the end of the summer, the mega-chlor-alkali producer, Olin Corporation (OLN: NYSE) bought up Pioneer. This buyout gave Pioneer investors a windfall of profits to the sum of $35 per share.
I wrote to you in late June about another infrastructure play, Insteel Industries, Inc. (IIIN: NASDAQ). Insteel produces a special type of support for highway barriers and bridges called engineered structural mesh. And as Christopher Hancock has pointed out, 80-plus bridges in the U.S. are in the same shape that the I-35W Bridge in Minnesota was before its unfortunate collapse (not to mention that 30% all the bridges in the U.S. are considered structurally deficient or functionally obsolete). I mentioned that Insteel is in position to take advantage of the inevitable bridge-building boom that will sweep the U.S. in the months and years to come. Well, it still is… There is still an opportunity to make a move on this company.
And lastly, I recently wrote a follow-up on the highway-building theme when I talked last month about Sterling Construction Company, Inc. (STRL: NASDAQ). Sterling has been smart enough to keep its nose out of residential construction over the past few years during the housing boom. This put the company in position to do what it does best: Build roads, highways, bridges, water and wastewater treatment systems and pipe installations. With these focuses, Sterling will soon be looked at as a premier infrastructure provider to the state of Texas.
I’m sure we’ll be covering the U.S. infrastructure theme for some time to come, but today I’d like to talk about something a little different…
Canadian infrastructure.
As you can probably guess, Canada’s infrastructure problem is not nearly as bad or as costly as the U.S.’s, but with far fewer people and companies, the investment opportunities are just as big. According to Canada’s 2007 National Budget, approximately $1,000 per person will be thrown at their infrastructure problems over the next seven years. That’s $33 billion total.
This is only a start… According to the federal infrastructure department in Canada, Infrastructure Canada (IC), the current gap in infrastructure funding is between $44 billion and $125 billion. That’s almost what the entire infrastructure of Canada right now is worth (according to IC).
Imagine this for a second: Canada needs to match almost everything it has spent in the past on infrastructure. And they want to do all this while adding new trade systems to gain more access to Asian markets.
The budget points out problems such as: Poor road and highway conditions, weak bridges, inadequate water and wastewater systems, and a growing concern over Canada’s ability to compete for trade with the growing Asian economies. So to fix these issues, Canada is planning to use the allotted $33-plus billion to hire private companies to build the new (and rebuild the old) infrastructures throughout Canada.
As I mentioned, only a few companies exist and are big enough to handle many of these projects. And there is one that I feel will benefit the most… Aecon Group, Inc. (ARE: TSE).
Aecon has been a leader in Canada, especially in the Toronto area, in various businesses, which include infrastructure, concessions, buildings and industrial.
The infrastructure segment of Aecon’s business includes everything mentioned above, like road, highway and airport runway construction and paving; building dams, tunnels and transit systems; as well as utility construction like water and sewer systems, telecommunication networks and even mainline gas projects.
Aecon’s concessions segment takes care of maintenance, management and upgrades that go along with the ongoing operations of certain infrastructure projects.
The company’s buildings segment includes projects like commercial office buildings, schools, hospitals and government buildings.
And finally, its industrial segment handles everything from industrial pipe manufacturing and platform/assembly construction to electricity-generation facilities that range from nuclear and fossil to hydroelectric.
The company has proven itself throughout Canada by efficiently completing projects like the Bruce Power Used Fuel Dry Storage Facility for spent radioactive materials (from the many nuclear plants in Canada). But, the company is also diving into international projects like the construction and maintenance (over a 30-year period) of a new airport in Quito, Ecuador and a cross-country highway in Israel.
This kind of experience and trust from the Canadian government, not to mention the international community, puts Aecon in a great position in the upcoming infrastructure boom.
We will be following this trend and other infrastructure trends worldwide in the months and years to come. Until next time…