New Flyer Industries NFI.UN

The Facts (as of July 2, 2010)

Unit price: $9.77. Book value per unit: $1.78. Market cap: $462 million (medium). Distribution: $0.0975 per month or $1.17 per year. Yield: 11.98%. P/E ratio: undefined. Payout ratio: 76.5%. The equity is an income depository receipt, which is a stapled unit of one share and one bond. Since it is not an income trust, it is not subject to SIFT taxation beginning in 2011. However, it is structured similarly, with debt to create an income tax deduction for the company. The earnings loss in the current quarter is due mainly to accounting for amortisation and exchange rate fluctuations affecting assets and liabilities.

The Story

New Flyer is out in front as North America’s leading manufacturer of heavy-duty buses. Offering the broadest line of transit vehicles in Canada and the U.S., we have secured our strong position by providing reliable transportation solutions that meet the needs of today while anticipating the needs of tomorrow.

Known for breaking new ground with the first low-floor bus, the first diesel-electric bus and most recently, the world’s first zero-emission hydrogen fuel cell fleet, we remain dedicated to innovation and excellence as we provide customers with a wide range of products such as clean-running, fuel-efficient hybrid buses; zero-emission electric trolleys; buses with alternative fuels, like hydrogen, CNG, and LNG; and clean diesel buses.

Since issue at $10.00, the unit price has varied between $8.00 and $12.00. Distributions have been consistent. The company has a backlog of $3.6 billion, or about 4 years of production. Some municipalities in North America have cut back their purchases recently, but the need to replace their aging fleets remains. Fluctuating exchange rates affect the company’s income from U.S. purchasers.

Pros

Not widely followed by investment analysts. Public transit offers a green option, which should become more valued. The yield is attractive and would be adequate, even if there is no growth in share value. The structure is rare, and it may attract investors who need the income, improving liquidity and market price.

Cons

Somewhat illiquid. Around $750,000 trades in a typical day but there are few transactions. Earnings are vulnerable to exchange rate fluctuations, local politics and budgets. Workers are unionised, which could stop work temporarily during contract negotiations.

Impression

The company has a position that should resist most economic fluctuations, because of the backlog in orders. With a yield of almost 12%, the return is fairly dependable. There is also potential for gains, if the units reach $12.00 again.

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