A Member of Pat McKeough’s Inner Circle recently asked him about a Canadian penny stock that has acquired a number of prominent clients for its services.
Distinct Infrastructure Group has operations in Ontario and Manitoba, serving the telecommunications, infrastructure and utilities industries. It is chiefly responsible for installing cables and developing communications networks. The company acquired its current form through a series of acquisitions and has won contracts with a number of major clients, such as BCE, Rogers, Hydro One and Toronto Hydro. This is an impressive client list in this highly competitive field, notes Pat, but the company’s very high debt represents a significant risk factor.
Q: Could you give me your thoughts on Distinct Infrastructure Group? Thanks.
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A:DISTINCT INFRASTRUCTURE GROUP (symbol DUG on the TSX Venture Exchange; www.diginc.ca) provides design, engineering, construction and maintenance services to the telecommunications, infrastructure and utilities industries. It currently operates in Ontario, Alberta and Manitoba. The company’s services cover all aspects of installing cables inside and outside of buildings and developing communication networks.
To build the base for its current operations, the company started up in October 2013 with the acquisition of Pillar Contracting Inc. Pillar was a Fort Saskatchewan, Alberta, provider of streetlight and traffic-control services as well as painting and electrical work.
The company then bought Candesto Enterprises in April 2014. Candesto is a Calgary-based provider of road signs and guardrails.
In August 2015, about 16 months after the Candesto purchase, the company got its Toronto Venture Exchange listing through the reverse takeover of a shell company called DistinctTech Inc. It then changed its name to Distinct Infrastructure Group.
In November 2015, Distinct sold Candesto before buying Mega Diesel Excavating in March 2016 for $2.6 million.
In November 2017, the company then acquired all of the issued and outstanding securities of Crown Utilities for $17 million—$13 million in cash and 3.0 million Distinct shares. Crown specializes in the installation of utility services in Winnipeg and across Manitoba for commercial, industrial, and residential projects. Crown gets a significant percentage of its revenue from the province’s largest utility provider. Its specialty is the installation of shallow utilities: directional drilling, hydrovac excavation, ploughing, transmission lines/regulator stations, engineering and design/build.
Distinct’s shares took a big drop at the start of May 2018. That’s when the company was issued with a cease trade order (CTO) by the Ontario Securities Commission (OSC) for failure to file on time its audited annual financial statements for the year ending December 31, 2017. The cease trade order was rescinded in early June 2018. The company’s auditors, MNP LLP subsequently resigned, and were replaced with prominent accounting firm Ernst & Young LLP.
Penny stocks: Addition of Crown Utilities causes revenue to jump
Distinct’s revenue rose 27.4% in 2017, to $70.3 million, from $55.2 million in 2016. The company’s loss increased to $13.2 million, or $0.36 a share, from $3.1 million, or $0.12. The 2017 figure includes one-time charges of $8.0 million, mostly for writedowns and restructuring costs.
In the three months ended June 30, 2018, the company’s revenue jumped 45.8%, to $20.6 million from $14.2 million a year earlier. The increase in revenue was due largely to the inclusion of Crown Utilities. Revenue from its core business in Ontario remained stable. Distinct lost $1.1 million, or $0.02 a share in the latest quarter, compared to a loss of $6.9 million, or $0.20 a share.
The smaller loss was mostly due to the company’s new and profitable operations in Manitoba, which posted strong results. Cost controls also contributed.
Distinct’s long-term debt of $52.8 million (as of June 30, 2018) is a very high 3.1 times its market cap. That’s a big risk factor.
The company operates in a competitive industry, but it has been successful in winning contracts with major clients such as ATCO, Fortis, Toronto Hydro, Hydro One, Rogers, BCE and so on. Distinct is now closing its operations in Edmonton to focus on Manitoba and Ontario, and that should improve profitability.
Recommendation in Stock Pickers Digest Distinct Infrastructure Group is okay to hold, but only for highly aggressive investors.
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