Opinions
Benj Gallander
Capstone Infrastructure
CSE-T
COMMENT
Feb 03, 2015
Stock price when the opinion was issued
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Management has indicated the dividend is secure, although the payout is over 100%. They expect it to be over 100% for the next 2 years. Have over $60 million in the bank to cover it. Thinks the dividend is reasonably secure. Bristol Water is their investment in England, and the regulators said they were going to lower the payout by about 20%. Capstone is appealing that and there could be a decision in the next month or 2. He is happy to hold this. It is on his Buy list, but he can see where there could be some tax loss selling. Dividend yield of 9.5%.
(A Top Pick Aug 26/14. Down 22.64%.) Their co-generation plant in Belleville was working full time, but now it effectively is on retainer. It is a backup plant, which hurts the cash flow. They have Bristol Water in Britain and the government regulator knocked down the price the company was going to get by 5%, and is going to go down another 20% for the following 4 years. The company is appealing and hopefully will get a rate increase. Payout ratio is very high at over 100%, so obviously not sustainable. Have about $62 million in the bank, so they feel they can pay it for the next couple of years, and then will get down to about a 70%-80% payout ratio. Dividend of almost 10% is holding up the stock price, and he doesn’t think they will cut the dividend in the near future.
This is on his Buy list. They’ve had some headwinds. A major problem is that the payout ratio is very high and is not sustainable. They have enough money in the bank to cover this for the next couple of years. They won a $25 million lawsuit against the Ontario government, which is currently under appeal. They have to get down their payout ratio.
Just announced they are putting themselves up for sale. Thinks they can get a price between $4.50 and $6, which would be BV. The utility sector and infrastructure is hot. The company who takes them over can stop paying the dividend, which is about $30 million a year the company can pocket. They won a $25 million lawsuit against Ontario. It is being appealed, but there is a good chance that if you have already won, you will win again. They got a settlement on their Bristol Water plant in Britain.
Is the offer to buy a decent one? Expects the deal will go through. The company owns Bristol Water in England, so it makes it more attractive to a European company. They also have some good assets here. He is happy to sit with this. If it goes through, it should go within 6 months and 4%-5% is what your return is. Plus, you will still get one more dividend.
One of the main reasons he bought this was the dividend. They have taken a couple of hits lately. The Cardinal plant is now on a recycling basis. Also, Bristol Water in England lowered the price to consumers on the upcoming year and then goes lower for the next 4 years. This means there is less of payout to Capstone, whose payout ratio is about 130 and they are targeting 80%. They have to get the payout ratio down and have some projects coming online which will certainly help. Management feels the dividend is safe. Feels there is a reasonable possibility this company could get taken out.