ADF Group Inc. (TSX: DRX) is a Canadian Company specializing in the design and engineering of connections, as well as the fabrication and installation of complicated steel structures, heavy steel-built ups, and architectural metalwork.

Key highlights

• Robust financial performance: The Company's revenue increased by CAD 108.2 million to CAD 280.7 million in FY 2022. Year over year, revenue growth is mostly due to the completion of projects in the backlog over the analyzed periods. Adjusted EBITDA rose to CAD 17.7 million, while net income rose to CAD 9.5 million. The better earnings were driven by higher topline and regulated expenses, as well as lowered income tax expenses.

• Favorable market trends: Despite the uncertainty surrounding the pandemic and its numerous forms, the Company has performed well over the last year. Furthermore, the trends remain strong, with some optimistic signals. First, various investment schemes aiming at enhancing infrastructure in the United States and Canada have been launched in recent months. Certain market analysts predict market growth till 2025 in light of all of these projects. Several indicators, like the U.S. Architectural Billing Index ("ABI"), which is a solid predictor of future trends in new projects, also remains strong.

• Secured new contracts under the belt: Recently, new contracts of CAD 100 million were granted to the firm. The Corporation has been chosen to take part in new construction projects in the commercial building sector in the Southeast and Western United States, as well as the industrial sector in Eastern Canada. These new contracts are set to begin and will last until mid-2023.

• Healthy order backlog: on January 31, 2022, the ADF Group’s order backlog totaled CAD 373.1 million compared with CAD 436.2 million on the same date a year earlier. This variation is attributable to execution of contracts, net of new contracts and contractual changes. Fabrication hours accounted for 40% of the order backlog on January 31, 2022, compared to 34% on January 31, 2021. Fabrication hours are the Corporation's primary business and most value-added activity. Most of the contracts in hand as on January 31, will be progressively executed by the end of the fiscal year ending January 31, 2024.

• Improving cash cycle days: The company's cash cycle (days) is improving sequentially, which is a significant positive, meaning that it is taking less days to convert inventory to cash. In FY 2022, the company reported 85.6 days of Cash Cycle, the lowest in the last four years, which is appreciable.

• Strong inventory management: The company's inventory turnover ratio is improving sequentially, which is a significant positive. This ratio stood at 30.8x in FY 2022, compared to an industry median of 4.3x. Higher inventory turnover implies that a company's services are in high demand. It also has a lower average inventory days of 11.9, compared to an industry median of 84.0 days, suggesting that the company's cash is tied up in inventory for a shorter amount of time, indicating that it is churning its cash effectively.

Risks associated with investment

Several risk and uncertainty factors affect ADF's markets, which might have an influence on its business, financial situation, and operating results. These risks and uncertainties include, but are not limited to, variables such as global economic concerns. Economic conditions may put downward pressure on profit margins on new projects to be negotiated with clients, as well as the order backlog and new contract awards. Another significant risk is competition in the Corporation's business area. Furthermore, an increase in steel prices might be a concern, however this would be minimized by sale price adjustment provisions agreed to with clients and incorporated in contracts.

Financial Overview of FY 2022

 Source: Company Filling

• Robust revenues: In FY 2022, the company posted higher revenues up by CAD 108.1 million or 62.7% to CAD 280.7 million, against CAD 172.5 million in the previous corresponding period. An increase in revenues stems for the most part from the execution of projects in the backlog, during the analyzed periods.
• Rise in cost of sales: in the reported period the company’s cost of sales increased to CAD 256.0 million compared to CAD 146.3 million in pcp. The cost of sales as a % of revenue in FY 2022 stood higher at 91% compared to 85% in pcp.
• Decline in gross profit: In FY 2022, the company’s gross profit witnessed a decline to CAD 24.6 million compared to CAD 26.2 million in pcp, primarily due to rise in cost of sales.
• Higher net income: On the back of higher revenues in FY 2022, the company managed to post higher net income at CAD 9.5 million, compared to CAD 6.8 million in pcp, partially supported by lower operating expenses and lower income tax expense.

Top-5 Shareholders

The top 5 shareholders have been highlighted in the table, which forms around 15.59% of the total shareholding. Canadian Erectors, Ltd. and NCM Investments Ltd. hold the company's maximum interests at 10.24% and 2.61%, respectively. The company's institutional ownership stood at 2.61%, while strategic entities ownership stands at 13.35%.

Valuation Methodology (Illustrative): EV to Sales based

Analysis by Kalkine Group 

Stock recommendation

The company concluded FY 2022 on a high note, with revenues of CAD 280.7 million, a 62.7 percent rise over the previous similar period. The same kind of improvement was seen in the bottom line, due to higher revenue and better-managed costs. Furthermore, various investment schemes aiming at strengthening infrastructure in the United States and Canada have been launched in recent months. In light of all of these projects, market study predicts market growth through 2025, which is a significant positive for an organization.

The management kept itself busy throughout the reporting period by obtaining and executing several contracts; moreover, the majority of the contracts in hand as of January 31 will be gradually completed by the conclusion of the fiscal year ending January 31, 2024. Furthermore, the company has a robust inventory management system that is improving progressively, which is a key plus.

Therefore, based on the above rationales and valuation, we recommend a “Speculative Buy” rating at the last closing price of CAD 1.50 as on May 24, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 24, 2022). Source: REFINITIV, Analysis by Kalkine Group

*Recommendation is valid on May 25, 2022, price as well.

Technical Analysis Summary

Disclaimer

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