K-Bro Linen Inc. (TSX: KBL, OTC: KBRLF) reported decent fourth-quarter results, with earnings per share rising 1.1% year over year, while the dividend was left unchanged.

Revenue climbed 4.2% as new contracts made a full contribution for the quarter. EBITDA (earnings before interest, taxation, depreciation, and amortization) was 4% higher, despite additional one-time costs incurred due to the relocation of operations to the new Toronto facility.

Margins slightly declined compared to a year ago, and management warned that margins will remain under pressure for several quarters as the new Toronto facility becomes fully operational.

On a more positive note, management says the new Toronto facility has already won several additional contracts, which will boost revenue and improve capacity utilization.

Design and planning for a new facility in Vancouver, which will handle higher volumes under expanded contracts with 23 Vancouver regional healthcare providers, is well underway. The cost to build the facility, which is expected to be fully operational by the third quarter of 2018, is estimated at around $50 million.

Spending for this new facility pushed debt levels higher over the past year, but the balance sheet remains in good shape, with a debt-to-capital ratio of just 18%. Cash flow remains healthy, increasing by 4% compared to the previous year. And the dividend is well covered, based on a payout ratio of 44% of distributable cash flow.

Although construction costs are material, the new facilities should eventually drive profit growth and margin expansion. Longer term, K-Bro remains a winner in our estimation, but investors should be aware of the temporary disruption to profitability as new facilities come on line.

The stock is reasonably valued, with an enterprise value to EBITDA ratio of 11.1 times, which reflects a discount to its main peers. Shares of K-Bro currently yield 3.1%, and we estimate the stock’s fair value at C$46, or US$35.

Earnings Season Checklist

All of our companies have now reported earnings for the calendar fourth quarter. The table below lists the date of each announcement as well as any changes to the dividend.