Canam back in the opportunity list?

A while ago we discussed Canam on this site. I also discussed it Canam on portfolio update saying I would sell off my position in CAM soon enough to invest in other companies. At that point CAM advised that BC place would have cost overrun and that it could affect financials.

In the last seven months, Canam lost 55% of their share values and the company value have now dropped to 179M or 50% of book value. Could Mr.Market overreacted to Canam current position has to forget long term value in this company?

Lets revaluate CAM on today’s market price and financial conditions.

Canam Group Inc. (TSE:CAM) is an industrial company operating 12 plants specialized in the design and fabrication of construction products and solutions, which are marketed by seven business units in the commercial, industrial, institutional, multiresidential, and bridge and highway infrastructure markets. Canam Canada specializes in the fabrication of steel joists, joist girders and steel deck. Hambro offers a range of structural components, including its D500 composite floor system, Hambro girders and transfer slabs. Canam United States designs and fabricates open-Web joists and structural trusses. Structal-Heavy Steel Construction specializes in the fabrication of heavy structural steel components. Canam International exports Canam Group’s expertise. Structal-Bridges specializes in the design, fabrication and erection of bridges. Technyx markets outsourcing services.

In 2010 it completed the purchase of FabSouth and a steel us company called CMC which had 2 plants in US.

Dutil family is in this business for over a decade. Marcel Dutil (father) owns 12% of the business. He retired from management late in 2010 and Marc Dutil (son) took the effective control. This family have a strong incentive returning shareholders value. They have a big salary compared to net income (500k) but have applied a freeze on salaries early in 2009 to react to declining market conditions.

Canam group Inc. lost a great load of money recently. Recession have taken a big chunk of revenues but bad contracts also played a big role in CAM profitability. In the previous 12 months (TTM) CAM lost 1$ per share! On this 46M loss, 35M are related to BC place contract costs overrun. But hey, 11M are not “exceptionnal event”. They are a loss from regular operations. Let’s look at a larger picture, 5 year average.

When analysing the profit on a 5 year average you find that CAM has an average EPS of 0.82$. Can CAM climb back to profitability? CAM is in the construction universe and this market was hit hard by recession. Canceled order, price compression, agressive competitive bids. All these forced the company to adjust prices down. The reputation of Canam is high. They are winning orders after orders. Contracts backlog is maintained around 520M$. Sales are pumping up around 25-30% from last year revenues has expected from the FabSouth acquisition discussed here but profits are not following.

To ensure financial stability, CAM suspended dividend in august this year.

Cashflow from operation is currently negative due to an increase in accounts payables. Are those payable reliable? We cannot predic for sure but to engage in major projects like Canam is building, collaterals must usually be provided to ensure payments.

Current price to book is around 0,43. You get all the patents and knowledge over and above assets at half the price of building new ones! But you get a company burning throught the MOS at 6M$ per quarter. There still is a good load of inventory and assets to back up debt, but interest payment on debt is around 4.5-5M per quarter. It is a worry.

Value is there, opportunity is not (in my point of view). I’ll keep an eye on CAM for a profitable quarter earnings before jumping in.

Disclosure : None.

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