FP article!Cleaning up is a dirty business
Bennett Environmental
Ian Karleff
Financial Post
Tuesday, November 26, 2002
Bennett Environmental Inc. is busy burning dirt in what has proven to be a high-margin and fast-growing business. The company's stock (BEV/TSX), however, has been dragged through the dirt itself as of late, thanks to the uncertainties of being a one-facility operator with an impending management void.
Sadly, there are truckloads of contaminated soil in North America, but only six sites that can cleanse it, including Bennett's in St. Ambroise, Que. And while concern exists over the life of Bennett's contracts, overall industry capacity is rising, new contracts are flowing Bennett's way, and an arduous approval process is limiting the competitive landscape.
One of the problems for Bennett is that it knows these approval hurdles all too well as communities scream, "not in my backyard," each time a plant is announced. Its proposed incinerator at Kirkland Lake in northern Ontario has faced final approval delays until the second-quarter of 2003 from what was expected to be February, thanks in part to a milk producers' concern that the plant would drive away customers.
"The trick in this industry, and the value in the industry, is that of permitting. Permitting is difficult and a significant barrier to entry," said Avi Dalfen at Research Capital.
"We cut our target price as soon as the government announced further delay for Kirkland Lake. It's a question of timing the growth in this company ... an overwhelming majority of revenues are from one plant in Quebec," said Mr. Dalfen.
And while earnings growth has been strong, it's not guaranteed, which explains why the stock (BEV/TSX) has drifted down from an April high of $21 to a low of $7.33 in October. The company earned 31¢ a share in 2001, and is projecting earnings of 85¢ to 95¢ for 2002, and $1.25 to $1.33 in 2003. At the low end of Bennett's own estimates, growth is anticipated at 174% for this year, and 47% in 2003, which most would assume would come with a high stock multiple.
But analysts such as Mr. Dalfen, despite being confident that Kirkland Lake will eventually gain approval, are not convinced the company can deliver beyond 2003.
He expects earnings of 74¢ a share in 2002, and $1.08 in 2003, which based on yesterday's close of $8.50 values the stock at 11.7 times on a trailing basis, and only 8 times next year's profit.
Also damaging the company's valuation was the shutdown of its Quebec facility for seven weeks in June and July which along with other wrinkles, slashed revenues from an anticipated $12-million to a reported $9.1-million in the third-quarter.
Yet despite the problems, Bennett generated a gross profit margin of 57%, and net after tax margin of 25%, while growing revenues a handsome 38% from the year ago period.
Analysts have marvelled that the company's return on equity is around 50%, while it ships soil across Canada for $150 a tonne, and was able to underbid its main U.S. competitors for the Superfund soil remediation project in Manville, N.J.
Bennett recently won a project from the Canadian Department of Defence to clean up a PCB laden radar station in Saglek, Labrador, and noted that 30 more projects of this kind will be remediated in coming years. The company also signed a five-year deal with GE Canada to clean up its "significant" volumes of PCB contaminated material, although the deal doesn't specify volumes.
"Clearly, the business is uniquely profitable even during challenging times," wrote Sara Elford at Canaccord Capital.
Ms. Elford expects only 68¢ of profit in 2002 and $1.22 in 2003, but sees the stock tracking up to $12.75 for a PE multiple of 10.5 times.
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