Armtec Infrastructure

You would think the way that Armtec Infrastructure (TSX: ARF) has been trading over the past week that it was a Chinese company that was embroiled in a huge fraud allegation, but alas, the story is much more simple: bad business performance. The company’s Q1 report also came with an announcement they were cutting their dividend to zero.

The company has two main divisions, one dealing with products and one dealing with the services that sell the products. The products and services are for the construction and maintenance of various infrastructure-related projects in the public and private sector. The company’s revenues are broadly based across Canada.

Financially, Armtec formerly traded as an income trust and converted to a corporation. Its capitalization was primarily funded with debt (once you subtract intangible and goodwill from equity). The company has had a very rough 2010 and 2011 to date.

Probably the best recent decision management made was when they did a bought deal financing (of equity), selling about 3.6 million shares for $16.20 a piece on April 13, 2011 – which you can now buy for 75% less! This raised about $50 million in net proceeds for the company, which they used to pay down their line of credit – their debt at the end of March 2011 was $290 million, and this will be about $50 million less. You also wonder how much due diligence those investors that paid $16.20 a pop did on the company – it has been a continual slide downhill leading up to last week’s catastrophic result.

I am not going to comment too much on valuation since my investigation is still ongoing, but there could be value in the company – either the equity or convertible debentures. You would have to determine whether the company can get back to the profitability it had back in 2008-2009 (where they were delivering considerable operating income) or whether the current state is more likely. For example – how much was this company aided by the stimulus package by government?

This is also a small lesson for people investing in companies that are heavily leveraged and mainly give out cash – any hiccup in the operation and the financial state of the company becomes a much more dominant concern than the operational performance. Armtec is facing loan covenant violations which it will have to renegotiate, likely to the detriment of shareholders.