Badger Infrastructure Solutions Ltd (TSX: BDGI) is North America's provider of non-destructive excavating services. Its key technology is the Badger Hydrovac, which is used primarily for safe excavation around critical infrastructure and in congested underground conditions. 

Key Highlights 

• Robust Guidance on Upcoming Years: Profitable, long-term, and sustainable growth is a priority for the organization. Furthermore, it expects to boost sales in the United States and expand its Adjusted EBITDA by 15% on average over the next 3-5 years. It also aims for a yearly Adjusted EBITDA margin of 28% to 29%, with revenue per truck every month exceeding CAD 30,000 (mixed currency).

• Improving Cash Collection Cycle: 90% of Badger's trade receivables were 90 days or fewer as on September 30, 2021, compared to 77% at FY20 end. The company is still actively managing its receivables portfolio and improving all parts of the cash collection cycle. Improved accounts receivable collection metrics have come from the deployment of additional credit and collections systems.

• Sequentially Expanding Liquidity Ratios: In Q3FY21, the company continued its momentum and saw sequential improvement in its liquidity ratio, demonstrating that it is working hard to strengthen its liquidity. Its quick ratio was 1.40x for the reported period, compared to 1.26x for Q2FY21, and its current ratio was 1.50x, higher than 1.35x for Q2FY21.

Source: REFINITIV, Analysis by Kalkine Group

• Industry Beating Margins: Despite the turmoiled period due to the COVID-19 Pandemic, the company maintained its pace and witnessed spirited performance across its margin matrix. In addition, the management's solid determination helped them leap the industry medians on many fronts in Q3FY21, which exhibits its competitive advantage within the industry. The chart below gives a glimpse of this.

Source: REFINITIV, Analysis by Kalkine Group

Q3FY21 Financial Overview (In thousands of CAD)

Source: Company 

• In Q3FY21, the company reported revenue of CAD 171.8 million against CAD 156.9 million in the previous corresponding period. An increase in the revenue was mainly due to a healthy contribution from its U.S. operations.
• The company posted a gross profit of CAD 47.0 million, against CAD 56.2 million in pcp. The decline in gross profit was mainly due to higher direct costs, which stood at 72.7% of revenue compared to 64.2% in the previous corresponding period.
• Operating profit stood at CAD 18.2 million, against a profit of CAD 22.6 million in pcp.
• The company posted a net profit of CAD 12.4 million compared to CAD 16.2 million in pcp, primarily due to the above-stated reasons, partially supported by lower income tax.
  

Risks Associated with Investment

Further restrictions by the government might lead to delays in project execution. Moreover, a liquidity crunch in the overall economy may impact the trade and other collections. Other risks involved with the company includes the foreign exchange risk, as it derives significant revenues from the U.S. 

Valuation Methodology (Illustrative): EV to EBITDA

Stock Recommendation

BDGI's revenue in the third quarter increased year over year and from the year's first half. Individual regions and customers are also recovering, as they have been since the second quarter. Gross margins in Canada and the United States rose from the second quarter as market activity levels increased, a significant benefit. The company is committed to achieving profitable, long-term, and sustainable growth by driving revenue growth and returning to historical margin levels. In addition, the firm plans to increase its sales in the United States over the next 3 to 5 years, with annualized Adjusted EBITDA margins of 28% – 29%, which is a key positive. Therefore, based on the above rationales and valuation, we recommend a "Speculative Buy" rating at the closing price of CAD 31.92 on November 22, 2021.

One-Year Technical Price Chart (as on November 22, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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