Company Profile

Calgary-based Black Diamond Group Limited (TSX: BDI) is a leading provider of space rental and workforce accommodation solutions. The company operated in Canada, the United States and Australia. The company’s operating segments include Modular Space Solutions (MSS) and Workforce Solutions (WFS).

Segment Overview

MSS, through its principal brands, BOXX Modular, Britco, and MPA, owns a large rental fleet of modular buildings of various types and sizes. Its network of local branches rent, sell, service, and provide ancillary products and services to a diverse customer base in the construction, industrial, education, financial, and government sectors.

WFS, through its principal brands, Black Diamond Camps and Black Diamond Energy Services, owns a large rental fleet of modular accommodation assets of all types and sizes and a fleet of liquid and solid containment assets. Its regional operating terminals rent, sell, service, and provide ancillary products and services including turn-key operated camps to a wide array of customers in the resource, infrastructure, construction, disaster recovery, and education sectors.

Investment Rationale

• Resilient and Diversified business model: Despite the near-term disruption to certain markets caused by the COVID-19 pandemic, the Company remains committed to executing on its long-term strategy of growth and diversification. The MSS business has remained stable, and the core rental revenue driven by MSS assets is expected to remain healthy owing to the diversified nature of the BDI’s customers, geographies, and end-markets. Further, because of the pandemic and physical distancing measures, over the last month and a half, the group has seen an increase in demand for certain products and services both within the MSS and WFS segments. These products include testing or pre-screening facilities, hand-wash or sanitization stations, field hospitals, and quarantine centres, among others. The Company is also observing an increased demand for square footage at existing facilities to facilitate physical employee-distancing on site. Overall, MSS performance is expected to remain relatively stable in the near-term, and as the global economy begins to re-start in the coming months, the management expects a resumption of steady growth.
• Ample Liquidity: At the end of Q1FY20, the company had access to ABL credit facility, which has a maturity date of October 30, 2023. The ABL Facility consists of a maximum CAD 200 million revolving lines, plus an uncommitted CAD 50 million addition. This reflects that the company has adequate liquidity to continue to operate through the foreseeable future and pursue its planned business objectives. Further, the management in the recent conference call stated that they believe that the ongoing cash generated from operations will be sufficient to allow it to meet ongoing requirements for working capital, maintenance costs, administrative expenses, and interest costs.
• Shares hovering in a long-term bullish zone: At the last closing price, Shares of BDI traded above the long-term support level of 200-day simple moving average price of CAD 1.60, which typically considered to be a long-term favourable price trend in an underlying. Price/200-day SMA ratio of BDI stood at 1.06, which implies that the closing price was 6% above the 200-day long-term support level of the stock. Further, its shares have traded above its 5-day, 10-day, 20-day, 50-day and 90-day moving averages, which is another positive technical trend in the stock.
• Risk Associated to the Investment: Black Diamond's cash generated from operations will be dependent upon future financial performance, which in turn will be subject to financial, business, and other risk factors, including factors beyond Black Diamond's control. At the same time, recent macroeconomic shocks in the form of oil price war and COVID-19 pandemic have presented near-term challenges in parts of the group's platform. However, the company is well-equipped to weather any prolonged weakness in end-markets, given the solid liquidity position.

Financial Highlights: Q1FY20

Source: Company Filings.

During the first quarter of the financial year 2020, the company’s total revenue declined marginally by 1% to CAD 45.1 million against CAD 45.4 million reported in a year over period. During the quarter, rental revenue surged 17% to CAD 17.10 million against the corresponding previous financial year while non-rental revenue increased 16% on an annual basis. This increase was largely offset by a 41% annual reduction in the lodging revenue, which came in at CAD 6.0 million and 14% decline in the sales revenue to CAD 5.6 million. Consequently, rental revenue contribution in the total revenue surged to 38% from 32% reported a year-ago, non-rental revenue contribution leapt up to 37% from 32% reported a year-ago period. However, lodging and sales revenue contribution declined to 13% and 12% from 22% and 14% recorded in the same period of the previous year, respectively. Gross profit margin improved by 4 percentage points to 39% from 35% recorded a year over period, driven by 4 percentage points reduction in the direct costs to 61% of the total revenue from 65% of the sales a year before.

Direct costs related to rental revenue include labour, fuel, materials, freight, maintenance, rent on subleased properties, fleet insurance and servicing of rental units. Direct costs related to lodging revenue include catering services, utility costs, consumable materials and other services required to provide turnkey lodging services. Direct costs for the quarter came in at CAD 27.4 million, down 7% from the previous corresponding period primarily due to a decrease in both construction and transportation services and used fleet sales, partially offset by an increase in personnel costs.

Adjusted EBIDTA as a percentage to the revenue improved to 22% from 18% reported a year-ago period, driven by 22% improvement in the adjusted EBITDA led by improved gross margin and partially offset by a marginal increase in the total administrative expenses during the quarter under consideration. In Q1FY20, the fund from operation increased by 17% to CAD 10.3 million from CAD 8.8 million reported a year-over period.

Change in accounting estimate

In the Q1FY20, BDI conducted a review of its estimates regarding property and equipment, which resulted in changes in the residual values of its space rentals fleet equipment and workforce accommodation rental equipment. It was previously estimated that space rentals fleet equipment and workforce accommodation rental equipment had a nil residual value at the end of their useful lives, whereas it is now estimated that these assets will have residual values of 25% of cost and 10% of cost, respectively. This change in estimate has been accounted for prospectively from January 1, 2020 and has resulted in a decrease in depreciation expense of CAD 1,846 in the three months ended March 31, 2020.

Stock Performance

1-year price performance (as on July 14, 2020, after the market close). Source: Refinitiv (Thomson Reuters).

At the closing (July 14, 2020), shares of BDI traded flat against the previous trading session at CAD 1.70. Over the last year, its shares have tested a 52W high price of CAD 2.20 on January 03, 2020 and a 52W low price of CAD 0.90 on April 02, 2020. At the last closing price, BDI shares have recovered approximately 88.9% from its 52W low price level over the past three months and traded approximately 23% below its 52W high price level. This reflects a sharp recovery in the script in a short-time span.

Over the past three months, the stock had delivered a price return of ~32% and increased by ~31% in a month over period. The relative outperformance of the company against the benchmark index in the period mentioned above is 25.41% and 18.11%, respectively. However, on a Y-o-Y basis its shares are featuring a negative price return of 13%.

Further, the 14-day and 9-day Relative Strength Index (RSI) oscillator hovering above neutral zone but not entered the overbought zone. The 14-day and 9-day RSI stood at 68.48 and 72 respectively. BDI’s 5-year average monthly beta stood at 2.07, reflects a higher volatility in the script against the benchmark index.

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, together hold around 35.16% stake in the company. Kernwood Ltd. and Haynes (Trevor) holds the maximum interests in the company at 13.93% and 6.76%, respectively. Further, five out of top-10 shareholders have increased their stake in the company over the last three months, with Labrie, Tobias Gerald and Melanson (Patrick) are among the top investors in the company which have increased their stakes by 0.04 million and 0.03 million, respectively. The institutional ownership in the BDI stood at 10.48% and ownership of the strategic entities stood at 25.08%, respectively

Source: Refinitiv (Thomson Reuters).

Valuation Methodology (Illustrative): EV/EBITDA based Relative Valuation

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months 

Stock Recommendation

The group’s performance in the first quarter of FY20 was moderate, with 17% surge in the consolidated rental revenue to CAD 17.10 million and rental revenue contribution in the total revenue surged to 38% from 32%. Further, on account of increased gross margin, the company witnessed a 22% improvement in the adjusted EBITDA. The company has ample liquidity which seems enough to meet the near-term requirement as management is confident enough to meet the ongoing requirements for working capital, maintenance costs, administrative expenses, and interest costs via internal fund generation. However, Net debt to EBITDA ratio of 2.88 against the industry average of 2.33, possess a relatively higher balance sheet risks for the company.

From the technical standpoint, Shares of BDI traded well above the long-term support level of 200-day simple moving average price of CAD 1.60, which typically considered to be a long-term favourable price trend in an underlying. And its shares also traded above the crucial short-term support level of 50-day and 90-day moving averages, which implies favourable technical indication in the stock. Further, the moving average convergence divergence (MACD) is rising, with the difference between 12-day EMA and 26-day EMA is positive, another favourable technical trend.

We have valued the stock using the EV to EBITDA based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). For the said purpose, we have considered peers like Mullen Group Ltd, Horizon North Logistics Inc, and Pason Systems Inc etc. 

Therefore, based on the above rationale and taking consideration of risks associated to the investment, we have given a “Speculative Buy” recommendation on the closing price of CAD 1.70 (on July 14, 2020).

*Recommendation is valid at July 15, 2020 price as well.

Disclaimer

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