Toronto’s Victoria Park transit station, a renovation of IBI Group.IBI Group
The worst may be over for investors in troubled architecture and design company IBI Group Inc. now that it has a new plan to rebuild.
Its shares fell to an all-time low in December amid concerns of massive dilution due to a mounting debt load and millions of dollars in writedowns. The stock has since pulled back from the brink and is up more than 55 per cent so far this year as the Toronto-based company works to boost cash flow, while aggressively cutting costs and restructuring its finances. It's also seeking asset sales as another way to tackle its debt problems.
It's a change in direction for IBI, which for years was an eager acquirer of engineering and architecture firms to fuel its growth. The company says it was hit hard by the latest global recession, including its exposure to the U.S. housing sector, as well as cuts to transportation and other infrastructure spending across North America and Europe. About 65 per cent of the company's business is in Canada and the rest is split between the United States and international spots such as Britain and Ireland.
To cope with the impact of the economic slump, IBI suspended its dividend last May. That sent its stock sliding before hitting an all-time low of 65 cents in December, up from a 52-week high of $5.18 in mid-April, 2013. The company has also taken significant writedowns in recent quarters. Chief executive Scott Stewart recently called last year's operating performance "unacceptable" as he tries to push through the company's so-called "recovery program."
Analysts are starting to gain faith IBI's turnaround efforts, but remain cautious.
"There is a glimmer of hope," said Frederic Bastien, an analyst at Raymond James who has a "hold" on the stock. "I want to see more progress, but I'm happy with where they are going."
He's optimistic in part because about 43 per cent of the stock is owned by partners with the company, which means they have a personal interest in restoring shareholder value. Mr. Bastien also believes the newer management team is taking the right steps to fix IBI's financial position.
"There's still a lot of risk out there," Mr. Bastien said. "Before I go to a 'buy,' I have to be really convinced that this is going to make our clients money."
Among seven analysts that cover the stock, six have a "hold" recommendation and one says "sell," according to S&P Capital IQ. The analyst consensus price target for IBI Group over the next year is $1.35.
Scotia Capital analyst Mark Neville recently upgraded his recommendation to "sector perform" from "sector underperform," saying in a note that, "while not yet out of the woods, we believe the company has viable options to pay down and address near-term debt maturities, potentially without diluting its equity." He also increased his target price to $1.25, up significantly from 25 cents.
Canaccord Genuity analyst Yuri Lynk also upgraded IBI to "hold" from "sell" and doubled his price target to $1.50 recently, saying the "situation appears somewhat less tenuous."
National Bank Financial analyst Trevor Johnson also feels better about the company's ability to bounce back and has a "hold" on the stock.
Still, he said, "it's hard for me to get excited, even if you do believe in the turnaround," citing the company's debt load. Investors might be interested in owning one of its convertible debentures instead of stock, he said.
IBI said late last month that it was improving its cash flow and backlog, and working on ways to reduce its debt, including the potential sale of "non-strategic" assets as part of its recapitalization plan. In an interview on Monday, IBI president David Thom said the company is making good progress on its recovery efforts.
"There is some work on the financial restructuring that has to be done, but the basics of our business are very good," he said. "It's a good story."