Badger Daylighting ltd.

Badger Daylighting ltd (TSX: BAD) is a Canada-based company that provides non-destructive hydrovac excavation services based on its core technology, the Badger Hydrovac System. The Badger Hydrovac System is an excavation unit that is used primarily for digging in areas with buried pipes and cables.

The Management recently declared a monthly cash dividend CAD 0.05 per share, payable on September 15, 2020.

Q2FY20 Financial Highlights: Badger Daylighting announced its quarterly results, wherein the company posted total revenue of CAD 134.484 million, lower than CAD 161.21 million in the previous corresponding period (pcp). The company witnessed a slowdown in the operations, both in the U.S. and Canadian market due to the impact of COVID-19 on economic and lower construction activity levels. The group witnessed a jolt in revenue in Western Canada and from the oil and gas producing regions within the U.S., primarily attributable to an ongoing reduction in oil and gas demand. However, average hydrovac customer rates, within the majority of the U.S. and Canadian markets, stood at par with the previous corresponding quarter. The company’s gross profit stood at CAD 46.4 million as compared to CAD 50.6 million in pcp, due to lower revenue, partially offset positive impact from the business restructuring and cost reduction initiatives implemented during the first half of the FY20. The quarter was marked by improved labour efficiency and a reduction in non-labour related costs such as training, travel etc. Adjusted EBITDA stood lower at CAD 35.559 million as compared to CAD 39.224 million in the previous corresponding quarter. However, Adjusted EBITDA margin stood higher at 26.4%, as compared to 24.3% in pcp. Net profit stood at CAD 1.701 million as compared to CAD 11.949 million in pcp.

Q2FY20 Financial Highlights (Source: Company Reports)

Risks: The lower activities in the oil and gas divisions across North America might result in a decline in the order book and lower backlogs for the company. A further breakout of the COVID-19 might result in a slowdown in construction activities, which could affect the group’s performance.

Valuation Methodology: EV/EBITDA Based (Illustrative)

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

Stock Recommendation: The stock of BAD stood resilient despite a slowdown in the industry and appreciated ~9% so far this year. The company’s operation was affected due to COVID-19 pandemic, and the group reported a decline in the revenue. However, the company improved its EBITDA margin due to improved operational efficiency, which is impressive. The group mentioned that Early third-quarter revenue is tracking at approximately 85% to 90% of the revenue level experienced in the same period in 2019.  However, the North American economic recovery is in its early stage and presenting considerable uncertainty.  The group remains focused on generating profitable long-term sustainable growth to drive total shareholder returns. The company does not expect that the impact of the COVID-19 related economic slowdown will impact the long-term growth potential for non-destructive excavation. We have valued the stock using EV/EBITDA based relative valuation method and have arrived at a lower double-digit downside (in percentage terms). For the said purposes, we have considered CES Energy Solutions Corp, Boyd Group Services Inc and Superior Plus Corp etc. as a peer group. Hence, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 38.35 on September 09, 2020 and look for the better entry point.

BAD Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Disclaimer

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