Strategic Action Latest in Ongoing Drive to Maximize Shareholder Value
There is an old saying that pessimists live longer as they are never surprised. Certainly, an apropos approach with resource stocks' investing.
Taking the hard decisions in challenging times should not be the mark of a company in turmoil, but of one that is prepared take the risks necessary to ensure consistent growth and sustainable shareholder value.
For reasons that are generally known, the oil price took a header in 2015, pretty much imploding the resource sector in Western Canada. While the oil price has stabilized, albeit at lower levels, it has become apparent that the recovery belongs to the savvy. Luck has or will have little to do with it.
"While our recent share buyback action is indeed aggressive, Enterprise's Board of Directors feels strongly that the Company's current share price does not reflect the vastly improving business reality," stated Leonard Jaroszuk: President & CEO of Enterprise Group (TSX: E). "That reality is reflected in a significant and sustainable rise in customer spending and planning to the point that we find ourselves scaling up to extend our capacity. We also continue to strategically cut costs to help maximize profits. Just as management took the bold step of increasing its personal holdings from 6.7% to 18.4% (+275%) in the worst two years of the decline, we felt it was time to further demonstrate the undervaluation of our shares."
And sometimes a small story can be more illuminating than a sterile recitation of facts or actions.
Edmonton-based Enterprise Group (market cap C$17.5m) is that story. As a consolidator of construction services companies operating in the energy, utility and transportation infrastructure industries, Enterprise has its ear to the ground. The Company must anticipate and move quickly as its place on the resource recovery food chain is critical. Without the ability to build infrastructure for pipelines, drilling etc., the overall resource recovery would be significantly compromised, almost regardless of price volatility.
Higher demand for energy and utilities coupled with increasing commodity prices, will allow producers and utility providers to reinvest into Infrastructure.
Let's start at the end. On June 7th last, Enterprise announced the culmination of two years of action; an NCIB (Normal Course Issuer Bid) to buy back and retire approximately 5% of its roughly 55.7million issued and outstanding shares.
The reason? Like most companies who take this action, it is because for whatever reason--markets, low profile, or just hanging on a proverbial meat hook within a tough business sector-- management feels its share price is too low and/or does not reflect fair value in the current cycle. As a strategic action the buyback increases the nominal value of the shares as well as delivering mandated shareholder value.
On March 31st, 2017, the breakup value of Enterprise shares, which are currently trading at C$0.31, was C$0.87.
While all manner of resource and associated companies were closing, downsizing or selling out—if a buyer could be found—Enterprise took advantage where it could to position for the inevitable recovery. Early on it made the determination that cost cutting was key, but also to position itself as a resource for its customers. As it has found, this tack would pay dividends in the future. As part of that overhead reduction, the Company reduced personnel at all levels by a total of 30%.
Perhaps one of the more important actions was the sale of one of Enterprise's subsidiary TC Backhoe, purchased in 2007 for $12 million. Under Enterprise's stewardship over the next 9 years, the company generated revenues of $155 million and was sold in 2016 for $20 million. The proceeds contributed to debt reduction in that challenging 2-year period by 54% to $24.2 million.
"Enterprise has generated positive cashflow every quarter since the downturn with the exception of Q2 2015." stated Desmond O'Kell, Senior Vice President. "Debt reduction, along with sale of redundant assets--$4 million more to be unencumbered in October 2017, will further reduce debt payments by $68K per month. Great lengths have been taken to reduce the cost structure while stabilizing gross margins and service levels to the client. Year over year, G&A was reduced by another $1 million."
As Enterprises' several businesses are already running close to capacity, that original plan was and continues to be sound. One of the main issues is that the Company is having a tough time hiring to meet rising demand. That said, given its reputation in the oil patch and beyond, skilled employees are being found.
The teachable moment for other company principals is two-fold. First, in good times and bad, become a value-added resource and even mentor to your clients. They will remember who stood with them through the 'sleepless nights.' Always plan for growth but temper with a significant eye to disaster.
Enterprise is also always on the hunt for accretive acquisitions. The Company is implementing a strategy of acquiring and consolidating established, profitable construction services companies with a near term goal of obtaining annual sales revenue of over $150 million. Enterprise is consolidating companies that have a proven track record, are well managed and are financially successful.
Best for investors to remember--to extend the use of worn adages-- talk is cheap. Enterprise was caught by the downturn just as everyone else. It had, however, a plan in place and crisis managed the challenges with cost-cutting, strategic asset sales and just straight up good management, coming out of the period stronger than it went in.
In the final analysis, no matter how good a product or service, proactive, savvy management is what you are investing in.
The Enterprise experience demonstrates that even the most vicious sector collapse can be successfully managed; even if the market doesn't yet realize it.
For questions or additional information, please contact:
Leonard Jaroszuk: President & CEO, or
Desmond O’Kell: Senior Vice-President
contact@enterprisegrp.ca
http://www.enterprisegrp.ca/
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