First Look: Distinct Infrastructure (DUG.V)

03/16/2016
I missed Lite Access Technologies (LTE.C).
Actually, that’s not the right way to put it – I called Lite Access as a nice little opportunity back when it was unknown and plunging to $0.42 and struggling to raise cash as they plodded through small city contracts to upgrade fibre optic cable.
Lite Access’ problem, back then, was they were small. They had nice tech (blowing the fibre through pipe using air and rollers, rather than digging up whole streets), and they were nice guys, but it was tough to see how it would explode out to a national deal. Still, it was undervalued and prime for a bigger player to jump all over them, so I said so.
They’re at $1.70 now, barely six months later, because when mining is crap and oil is dead and tech is up and down, infrastructure – good old, gnarly, dust-covered infrastructure, is a good fallback.
If you’re looking at Lite Access for the first time, tough break – the horse has bolted on that one. Yeah, it might get to $2 maybe more, but your chance for short term multiples has passed. Well played to those who got in early. I got distracted by other things and did not.
I once liked Enterprise Group (E,T), the oil patch services roll-up, and told folks back when it was sitting at about $0.15 (pre-rollback) to get all up in. A few months later it was over a buck and times were good, but Enterprise management loved buying shiny things and didn’t see the oil slump coming and, when it all shrunk back to heck, they consolidated shares 3 to 1, thereby destroying any remaining love the market might have held for them.
But, again, those who got in early made mad profits. I got distracted by other things and did not.
All of which leads me to declaring I will not be distracted again when a nascent infrastructure company comes along and waves its ass in my direction.
But what infrastructure play is still out there, undervalued, underknown, oversold, and destined for solid government, mega-telco and construction work for the next fifty plus years?
Back in November, at Fabrice Taylor’s President’s Club Investor Conference in the Bahamas, I talked to the guys from Distinct Infrastructure (DUG.V) about their situation and made the mistake, in their eyes, of comparing them to Lite Access and Enterprise.
“We’re nothing like those guys,” the exec I spoke to roared, perhaps a little too loudly. “Those guys – I don’t want to speak ill of anyone, but Enterprise completely fucked up their situation and Lite Access, they’re fine but they’re niched,” he sputtered.
“We’re very different. We don’t come in for a small part of a project, we do the project.”
Lite Access has enjoyed some nice contracts over the last six months, with big telcos and local governments. Those invoices get paid and, if you can fulfil them well, they multiply going forward.
So, Distinct Infrastructure? They have similar big contracts with telcos, only bigger. From what I can tell, about 30% of the work telecommunications giant Bell is doing in Ontario in fibre optic replacements and upgrades is going to DUG. That’s bad ass doughbucks from a blue chip customer. Distinct isn’t just blowing fibre through pipes, it’s laying the pipes, digging up the pipes, replacing the pipes, handling the cable and the fibre and the digging and the building.
Lite Access is the company Distinct might call on to help complete a small part of their much larger project. Or maybe (more likely) they’ll just do it all themselves.
I liked Distinct back in November, when it was full of piss and vinegar and ideas and acquisition targets, but it was still a ‘wait and see’. Now, if you look over their newsflow for the past few months, the wait is clearly over.
Distinct has the client quality of Lite Access, and the acquisition strategy of ye olde Enterprise Group. They’re grabbing at good little companies that can add to their offerings, add to their customer base, add to their geographical reach, and add to their knowledge base.
The company describes itself as offering “design, engineering, construction, service and maintenance,” including construction, hydro-excavation, aerial construction, horizontal directional drilling, and underground construction.
That’s a broad offering, but it’s been rapidly growing.
In November of last year, the company acquired a $20m acquisition credit line, and this month they did something with it, applying around 10% of that line to sucking in Edmonton-based Mega Diesel Excavating.
Mega Diesel was a Distinct competitor. It earns revenue, and its 7 hydrovac trucks increased Distinct’s fleet by around 30%, as well as allowing them better penetration into the western provinces.
That’s a solid news release, but it didn’t budge the share price by much because nobody is looking at this thing.
Well, I am, and I expect there to be more acquisition news in the weeks and months ahead.
DUG isn’t niched like Lite Access. It isn’t industry-reliant like Enterprise. It’s a broad, ‘we do it all’ unit that is undervalued as things stand right now, and would have to jump about 50% to get to a place where that’s not the case.
The stock has been sub-$0.10 since it RTOed into what was QE, and only since the acquisition has it broken the $0.10 barrier (Stock sits at $0.13 at the time of writing). There are 263 million shares out, which is a bit floppy in Vancouver terms, but the COO told me they have no plans to consolidate because, with the acquisition line already there, and revenue being generated on a monthly basis (financials from Aug 2015 show over $8m in revenues with $1.4m EBITDA, and Q4 results are due any day now), there’s no need to raise money any time soon.
When I started researching for this piece, I spoke to two large investors, both who prefer not to be named, if they know of the company, based on their existing stakes in Lite Access. Both told me they have a growing position in Distinct and see it as a long term hold. One of those suspects there may come a time where LTE makes a run at Distinct – or vice versa, so he’s playing both ends of the deal. The other says he just likes companies that make cash with blue chip customers, especially in a market that is creaking around the edges.
The thinking: “When the economy is weak, government looks to use infrastructure to inject life into the market, and upgrading fibre is going to be a big deal for the next decade or more.”
What really makes me friendly toward Distinct, as compared to many others, is this corporate update, from early January, that lays out all the things Distinct set out to do in 2015, that it duly nailed. Expanding the fleet, a $2m deal with Sasktel, expanded bizdev, centralizing operations in the west, putting together an acquisition target list, getting financing for those acquisitions..
I don’t own any DUG. Yet. But looking at that quote chart, now’s the time to start picking it up. That sudden rise, and the pickup in volume, hasn’t come off the back of promo, it’s come of the first of what the company has said will be several acquisitions. Today’s drop from $0.15 back to $0.13 is expected, with most long holders now presented with a 50% profit. You may get some churn for a while as the company finds new investors and the long termers take their exit profits.
That’s fine. As Distinct transitions from ‘guys in trucks’ to ‘guys buying guys in trucks’, so too will the shareholder base move from ‘guys with RRSPS’ to ‘guys with ex wives’, and that’s when the stock starts to get nicely volatile.
If you’re a DUGophile and you’re currently jumping up and down yelling “Finally, DUG’s getting some love!”, I hear ya. If you’re convinced they’ll start acquiring US companies soon and do multi-million-dollar deals with Telus and Rogers and Shaw and whoever else, I hear ya. And if you’ve burned on Enterprise or you’re still in love with Lite Access, hey, no arguments from me.
But if you look at what DUG management are saying, what they’ve achieved so far, what they’re doing right now, and what that chart says is happened in the market, good god, so pretty.
Just don’t jump in before I get a chance to, or we’re not friends any more.
–Chris Parry
Disclosure: Don’t own it. Don’t work for them. Haven’t taken money to say nice things. Not trying to date the boss’ daughter. Although, I’m sure she’s very nice.

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