ATCO LTD. (Toronto symbols ACO.X [class I non-voting] $47 and ACO.Y [class II voting] $47; Income Portfolio, Utilities sector; Shares outstanding: 115.2 million; Market cap: $5.4 billion; Price-to-sales ratio: 1.2; Dividend yield: 1.8%; TSINetwork Rating: Above Average; www.atco.com) holds 53.1% of Canadian Utilities (see page 15). It also owns 75.5% of ATCO Structures & Logistics, which builds temporary buildings for construction and energy exploration firms; Canadian Utilities owns the remaining 24.5%.
In the three months ended September 30, 2013, ATCO’s revenue rose 3.5% to $1.02 billion from $981.0 million a year earlier. That’s mainly because higher power rates in Alberta increased Canadian Utilities’ contribution. The structures division’s revenue fell 2.5% after it completed three contracts to build temporary housing and offices at an Australian liquefied natural gas (LNG) project in late 2012 and early 2013.
Earnings jumped 63.0%, to $132 million, or $1.15 a share, from $81 million, or $0.71. Without unusual items, earnings rose 6.3%.
ATCO recently sold its 50% interest in a South American joint venture that supplies temporary structures to mining firms. It received $124 million for this stake.
This cash will help the structures division fund new projects. For instance, ATCO is currently building modular units for an LNG project on Australia’s northwest coast. The company expects to complete this project in the second half of 2014. In addition, ATCO is building over 2,000 rooms for the Jansen potash project in Saskatchewan and should complete this contract in 2015.
Due to its holding company discount, based on current prices, you can buy an ATCO share for $47 and get roughly $44 worth of Canadian Utilities. That means you get ATCO’s structures and other non-utility businesses, which provide a third of its earnings, for just $3.
This holding company discount is also why ATCO has a lower p/e ratio than Canadian Utilities: it trades at 13.6 times the $3.45 a share that it likely earned in 2013. ATCO just raised its dividend by 14.7%. The new annual rate of $0.86 a share yields 1.8%.
The class I (X) non-voting shares are more liquid than the class II (Y) voting shares.
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