HZNOF - Why Dexterra Is A Buy For More Than Just The 6% Dividend

2024-01-14 10:45:47 ET

Summary

• Dexterra's Q3/2023 results showed a 20% increase in revenue and a significant beat on consensus estimates.
• The company's Workforce Accommodations, Forestry, and Energy Services segment performed exceptionally well due to strong support services activity and wildfire activity in Canada.
• Dexterra is expected to see a 10% growth in its WAFES segment year-over-year, and the stock is rated as a "buy" by Wall Street analysts.

In the last few quarters since the bullish coverage on Dexterra ( OTCPK:HZNOF ), the stock fell slightly while the S&P 500 ( SPY ) gained 5.80%. At that time, the company posted third-quarter results and declared a dividend. The 8.75 cents a share dividend yields around 6%. What do the dividend and latest earnings do to Dexterra’s rating?

About Dexterra

Dexterra operates three segments.

First, its Integrated Facilities Management unit provides operational and maintenance solutions for infrastructure. The sectors include aviation, defense, education, rail, healthcare, and leisure.

In Module Solutions, Dexterra designs and manufactures building solutions for housing, commercial, residential, and industrial clients.

Dexterra’s third segment is Workforce Accommodations, Forestry, and Energy Services (“WAFES”). The accommodations solutions, forestry services, and access solutions target sectors including energy, mining, forestry, and construction.

Third Quarter 2023 Results

In Q3, Dexterra posted revenue increasing by 20% Y/Y to $310.8 million. Net earnings increased to $14 million, up from $5.2 million last year.

The company posted revenue results that beat consensus estimates by a wide margin. As the chart below shows, the company met or exceeded expectations in the last twelve quarters :

Strong support services activity in the WAFES unit is the primary catalyst. In addition, heavy wildfire activity in Alberta and British Columbia resulted in market share capture. This creates momentum for the sales force to capture growth from new major projects.

In the slide deck above , the wildfire activity across Canada resulted in around $30 million in revenue. The fire started in the spring in Ontario and Quebec. By the third quarter, activity expanded in Alberta, British Columbia, and the Northwest Territories.

WAFES has a superior brand that will expand Dexterra’s addressable market. Through a capital-light model, the firm has the flexibility to expand its business from future market opportunities.

Looking ahead, investors may exclude the impact of the wildfires to arrive at a 10% growth in WAFES Y/Y. The modest growth rate would explain the stock’s performance. Shares are trading in a range of between -4% and +6% in the last six months. Wall Street analysts rate the stock a “buy.”

Opportunity

Dexterra should expand profitability as it focuses on execution and costs. It does not have any aggressive merger and acquisition plans, which should help reduce its debt levels.

Year-to-date free cash flow of $26.3 million is up from $17.1 million last year. In Q4, Dexterra expects strong free cash flow conversion , thanks to a drop in working capital levels.

Should the share price fall, management may opportunistically buy back shares. In the third quarter, Dexterra bought back 323,700 shares at an average price of $5.82 and a cost of $1.9 million. Through up to May 2024, the company has a normal course issuer bid that allows it to buy another 1.3 million shares. This sets a floor on the downside risks of holding the stock.

Dexterra has a project involvement in Coastal GasLink. Crossroads Lodge is in the construction phase. When the project moves into the next phase, Dexterra will give capacity support.

Dexterra has new WAFES projects similar in size to that of Coastal GasLink. As they continue to ramp up this year, larger projects will come online.

Stock Scores

According to Stock Rover Research, Dexterra is trading at 27% below its fair value. The stock has strong grades. Its value score is 84/100 while the growth grade is even stronger at 96/100.

Dexterra's Risks

Delays in affordable housing project approval hurt Dexterra’s ability to work down its backlog. It received municipal awards but needs to see government and other agency approvals, too. As it engages in active discussions on several projects with the government, Dexterra will rebuild its project backlog.

The company sees dozens of affordable projects in Canada. In Western Canada, 22 municipalities are in active discussions. Dexterra is in a good position to win awards. However, investors should expect lumpiness in backlog and revenue growth as governments take their time selecting from the bidders.

In Q3, the company took a one-time $2.2 million impairment charge related to excess camp equipment. This involved a specific installation and due to location, the company needed to relocate the work to resolve the issue. Activity around Dexterra’s camp assets faces upward cost pressures. Fortunately, demand for energy, mining, and infrastructure is at very strong levels.

Dexterra’s stock is currently under seasonal weakness, where it underperforms between January and April every year.

The stock outperforms the index between May and September, with August as the stock’s best-performing month.

Your Takeaway

Dexterra did not reward its shareholders with a rising stock price in the last two quarters. Still, it pays to hold the stock that pays a 6% dividend yield. The fourth quarter will benefit from continued activity related to the wildfire. IFM and WAFES are strong businesses that will support the company’s revenue and EBITDA growth.

With many tailwinds in Dexterra’s business, the stock retains its “Buy” rating.

For further details see: