Canada’s primary stock market ended May 2023 with a broad-based decline. Some market analysts foresee extended volatility due to a potential recession in the second half of the year. Also, if a rotation occurs, investors might move to safer sectors, such as consumer staples, healthcare, and utilities.
However, a fast-rising stock in the industrial sector is less volatile, a good investment choice, and a screaming buy this month. Black Diamond Group (TSX:BDI) should be on your radar if you want to earn in two ways: dividends and capital gains. At only $6.14 per share, current investors enjoy a 27.55% year-to-date gain and partake of the 1.28% dividend yield.
Business overview
Black Diamond operates in the rental and leasing services industry. This $372.23 million company is a niche player whose two business units have strong free cash flow characteristics. Modular Space Solutions (MSS) and Workforce Solutions (WFS) serve diverse sectors and combine to deliver contracted rental revenues.
According to management, Black Diamond creates value through compounding cash flows from its low-maintenance, high-return, long-lived assets. Business stability comes from the asset, industry, and geographic diversification. In the first quarter (Q1) of 2023, Canada accounted for 59.7% of rental revenue, followed by the United States (32.3%) and Australia (8%).
MSS owns a large rental fleet of modular buildings of various types and sizes, while WFS owns a large rental fleet of modular accommodation assets of all types and sizes. The MSS rental fleet, in particular, has had a quarterly rental revenue-run rate CAGR (compound annual growth rate) of 19% since Q1 2016. Also, the average duration of the MSS lease portfolio is 51 months.
LodgeLink, a wholly owned subsidiary of WFS and a disruptive platform providing unique solutions for essential workforce travel, is rapidly scaling. Management sees a US$70 billion market opportunity in North America’s end-to-end crew travel management industry alone. Since the market remains fragmented, Black Diamond can be the global leader in the space.
Based on the unit economics table of Black Diamond, a 65% utilization of the assets translate to 425% and 13% lifetime return and annualized return on the initial investment. However, at 85% utilization rate, the figures are 525% and 17%, respectively. Also, the practical asset life is more than 30 years.
Positive outlook
In Q1 2023, total revenue, profit, and funds from operations increased 16%, 11%, and 10%, respectively, to $81.5 million, $21.4 million, and $4.4 million versus Q1 2022. Notably, LodgeLink’s net revenues rose 69% due to the strong uptake from existing and new customers. An encouraging sign for LodgeLink is the significant growth pace in the United States.
Because of the diverse nature of the existing asset rental business and strong contract coverage, management expects Black Diamond’s operating performance in 2023 to remain strong. In case macroeconomic events impact asset-level returns, the platform allows for the flexibility to reallocate free cash flow to accelerated debt repayment or shareholder returns.
Unstoppable momentum
The technology sector’s market growth in 2023, although a new round of interest rate hikes and recession could dampen the rally. However, Black Diamond’s upward momentum will likely continue due to its ever-growing asset rental business, propelling the industrial stock higher.
