Canadian construction products maker Canam Group Inc. shed nearly one-fifth of its market value after it reported a surprise loss for its latest quarter and announced a strategic shift that will see it abandon a major business line.
Shares in the small-cap company dropped as much as 26 per cent on Thursday before staging a small recovery. They ended the day down almost 17 per cent at $7.05, a level not seen since 2013. The stock has lost nearly half its value over the past year, with investors increasingly aggravated with disappointing earnings results.
The company, which is supplying steel components used to build two overpasses for Ontario's Highway 407 east extension project, reported weak fourth-quarter results that missed estimates on all key metrics.
The net loss was $2-million or 4 cents a share, reversing a year-earlier profit $17.8-million or 39 cents and falling short of the profit of 24 cents a share expected by analysts. Adjusted earnings before interest, taxes, depreciation and amortization came in at $9.5-million, about one-third of the $27-million expected. Revenue fell 1.5 per cent from the previous quarter to $486.5-million, a sudden dip after double-digit top-line growth through the first three quarters of the year.
Marc Dutil, Canam's chief executive, whose family owns a significant stake in the Saint-Georges, Que.-based company, said the poor performance reflect a non-residential construction market that slowed in Canada and was under pressure in the United States. But he said problematic large-scale contracts south of the border were a bigger factor.
"Our results are affected by negative margins on bridge projects in the United States and in particular by the allowance taken in the second quarter for a heavy structural steel project," Mr. Dutil said in a statement. "We are continuing discussions with the client to resolve the issue of additional costs and we are confident that we will reach an agreement."
The steel project in question is believed to be the new Mercedes-Benz stadium under construction for the Atlanta Falcons National Football League team and that is expected to be completed later this year. Canam said last summer it would take an after-tax reserve of $32-million in the second quarter of 2016 related to a significant project believed to be the stadium.
On Thursday, the company said it would conduct a thorough review of all its U.S. activities in the bridge sector in order to increase profitability. It also said it would no longer act as a structural steel contractor for complex, large-scale projects and only take on steel work that presents a "reasonable level of risk" that matches the size of the company.
Canam's backlog stood at $1.14-billion at the end of the year, a 3.7-per-cent decline from the year before. The earnings results have no effect on any of the company's financial covenants, management said.
Mona Nazir, an analyst at Laurentian Bank Securities, said she had expected margins and profitability to improve on a sequential basis as the large-scale stadium project winds down. Instead, the results illustrate a continued deterioration in core activities.
Whether investors should bet on Canam's stock-price recovery depends on their confidence in the strategy to improve margins coupled with the non-residential construction cycle, Ms. Nazir said in an interview. She said U.S. President Donald Trump's pledge to boost infrastructure spending could help as would a pickup in all broader non-residential construction. The United States represents 65 per cent of Canam's business.
Thursday's stock-price decline was due to the magnitude of the miss in results, leading to some erosion of confidence in Canam management, Ms. Nazir said. The decision to cut back on high-risk projects should bode well for financial results and ultimately stock performance going forward, she said. "However, the picture remains uncertain and visibility is limited at this point in time."
Out of the four analysts that cover the stock, two rate it as a buy and two a hold. The average 12-month price target is $10.50, according to Bloomberg data.