This Edmonton-based firm is one of the few energy services companies currently beating the market.
Storage tanks may not be the most exciting business, but investors can't help but be captivated by the returns of Edmonton-based ZCL Composites Inc., one of the few energy services companies currently beating the market.
Shares of ZCL, which makes fibreglass storage tanks for petroleum, water and corrosive liquids, are up by 15 per cent over the past year and 25 per cent per cent so far this year. Analysts are expecting the stock to rise at least another 10 per cent over the next 12 months.
A rapidly rising dividend – now yielding 3.8 per cent – plus share buybacks and a special dividend paid out in March have made the stock even more attractive.
"From a shareholder perspective, the company is doing everything right," said 5i Research managing partner Ryan Modesto, who has been watching the small-capitalization company more closely in recent months. He doesn't own the stock.
The quarterly dividend has increased 78 per cent over the past year, and the payout ratio is about 50 per cent, which means there's room for more rises, Mr. Modesto said.
"Those things – the special dividend and the dividend increase – are pretty big signals. They're trying to yell at you and say, 'The prospects still look pretty good for us.'"
About three-quarters of the business comes from the petroleum sector, a large portion of which is storage tanks for fuel at retail gas stations, and the rest is water storage and other tanks used to hold corrosive products used across the industrial and resource sectors, including chemical manufacturing, mining, agriculture, forestry and power generation.
ZCL has a leading market share across North America. About two-thirds of its revenue, which are reported in Canadian dollars, come from the United States and the rest from Canada.
ZCL chief executive officer Ron Bachmeier describes the company as more of an infrastructure play and argues it's countercyclical in today's energy market, since about 60 per cent of its revenue is from retail gas stations. He said lower gas prices have boosted demand for gas, which in turn has given retailers more money to replace their old tanks.
"Our dominant revenue stream, being retail petroleum, is going quite well in today's low-energy-price environment. That's really the essence of the story," Mr. Bachmeier said in an interview.
Among four analysts who cover the stock, three have a "buy" rating and one has a "hold." The analyst consensus price target over the next year is $9.42, according to Bloomberg. The stock is now trading at about $8.45.
Raymond James analyst Ben Cherniavsky increased his target to $9.25 from $8.75 after the company's first-quarter results beat expectations. Revenue grew 12 per cent to $36.2-million, while profit was 3 cents a share, up from 2 cents a year earlier. All divisions saw sales increase except for its corrosion tanks segment, which is also described as its above-ground fluid storage business. The water and petroleum tanks are underground.
"While the above-ground segment is expected to decline due to end-market headwinds, the outlook for underground is positive," Mr. Cherniavsky said in a note. "This will be driven primarily by the U.S. underground operations as a result of new construction by several large petroleum customers and continued market share gains, while water products should also benefit from new construction activity."
Mr. Bachmeier forecasts double-digital annual growth in all three divisions – petroleum, water and corrosion products – in the years ahead. The highest growth is expected to be in the water division, given the scarcity of the resource and a growing need to recycle and store it.
A risk for ZCL over the long term could be the impact of a rise in electric and hybrid vehicles on the road, lowering the need for fuel. While Mr. Bachmeier says that's potentially decades away, it's in part why the company is looking to expand the water side of the business.
"Our growth has to come from other markets, and water is the key market we've identified that we think has the highest growth potential," he said.
Other markets it's pursuing include food processing and storage of materials for other industries, such as automotive or aerospace manufacturing.
The company hasn't done a lot of acquisitions to date, but Mr. Bachmeier said they have the cash if one catches their eye.
"We aren't desperate for a deal," he said. "We don't need one, but we want one."