President's Club: IBG up +170% and other updates

IBI Group (IBG.TO) reported another strong quarter last Thursday that further bolsters the turnaround story we laid out in January. Revenues and earnings were both higher and the backlog remains strong. The top line grew 12% while adjusted EBITDA was up 22%. All-important margins also increased, to 13.6%, which is higher than the historical average and also higher than peers. Better margins was a central pillar of our buy thesis.

This year’s revenue guidance was slightly reduced, from $355 million to $350 million, because of a weaker British pound, but this is still 7% higher than last year.

EBITDA, given improving margins, should nonetheless keep growing faster. The company has installed a new ERP system which slowed billings (temporarily) and therefore tied up $14 million of cash in receivables. Still, despite a lower free-cash-flow profile in this quarter, debt dropped by $14 million and is now at 4.5 times EBITDA. Last year it was much higher at 7 times. The ERP system will eventually improve utilization and working capital.

Eight months ago we called for $8/share in 2-3 years and that still seems very achievable as the company pays down debt and the value of the enterprise shifts increasingly to equity holders.

Polaris Infrastructure (PIF) reported a good quarter last week as well, although for some reason the stock sold off at first before bouncing back and it’s up sharply now. EBITDA was $9.8 million on revenues of $12.1 million, both slightly lower than last year but ahead of what most analysts expected. The results were lower than last year because of planned maintenance on the plant, which took trimmed production levels. You have to love the margins on this business, though.

We spoke to CEO Marc Murnaghan and got an upbeat assessment. The drill program is complete and seems to have delivered one decent well, one dud (which found heat but then caved in) and one very good well. We would guess that we’ll see an incremental 8 MW of new power, representing $8 million of cash flow (US dollars). So the dividend story is unfolding nicely and we figure an increase to the dividend could come before year-end. We’ve received our first dividend (which is paid in US dollars) and there is another coming this month (they are quarterly.)

In other news, the dud well isn’t lost - it’s being used as a re-injection well. And one of the older re-injection wells may become a production well.

Plus there is the binary unit which the company is contemplating buying. Although expensive, the equipment (essentially a heat exchanger) could add 10 MW of power, meaning another $10 million US of free cash flow, but at very little risk compared to drilling. The return on the binary unit is about 40% so we figure it will happen. The new wells give the company the data it needs to more forward on the investment.

PIF seems cheap at about 5.5 times EBITDA while comparable companies are at 10x. This suggests significant upside if everything works out. It will always trade at a discount for its higher risk but the disparity should narrow.

We started buying at $10, bought a lot more at $7, and continue to add on weakness for yield and capital gain.

(Note that while Polaris always loses money on an accounting basis, this is because depreciation expense (which isn’t cash) is very high. The company’s auditors won’t allow management to write down the value of its plant to a reasonable economic level. Yet the company pays a dividend! It clearly generates free cash.)

We caught up to Helius CEO Phil Deschamps last week and found him feeling bullish. Enrolments for the trials are going well - they’re finding patients who match the profile of patients they’ve successfully treated in the past. This is obviously important because it improves the odds of FDA approval.

We will get an important data point in September, when preliminary results from the traumatic brain injury trial are released. We are very confident that the company will breeze through this milestone and look forward to the big news, likely in a few short months, that will determine if this technology works for TBI.

The only fly in the ointment is that the stock doesn’t trade much and drifts lower. Mr. Deschamps is going to spend some money getting the story out, hopefully bringing in some buying and enthusiasm. It is a very exciting story and easy to understand so we hope that this will give the stock a boost.

The .S shares are now convertible into normal HSM shares. If you own those just contact your broker.