Badger Infrastructure Solutions Ltd.

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 updates:

• Positive sectoral scenario: The company foresees substantial growth opportunities within the North American non-destructive excavation market due to rising demand for the maintenance, upgrade and expansion of the critical infrastructures due to the ongoing proposed infrastructure plans taken by the Government. Hence, the above is likely boost the demand for non-destructive excavating services, while we believe the group is highly poised to take advantage arising from the sector.

• Robust profitability margin: The company commands higher margins than the industry median, which indicates improved operational efficiencies. Notably, during Q3FY21, the group reported its EBITDA margin and operating margin of 21.1% and 10.6%, respectively, versus the industry median of 9.8% and 6.5%, respectively. Additionally, the company reported its net margin of 7.2%, as compared to the industry median of 4.6%.

• Healthy D/E ratio: The company has a prudent capital management and reported a D/E ratio of 0.58x in Q3FY21, as compared to the industry median of 0.61x. An improved debt to equity level is a key positive and indicates better financial flexibility.

Q3FY21 Income Statement Highlights:

• BDGI announces its quarterly result, wherein the company posted its revenue of CAD 171.753 million, as compared to CAD 156.853 million in pcp. The growth was primarily due to higher Hydrovac service revenue supported by improved market activity primarily from the non-residential construction segment.
• Gross profit stood at CAD 46.968 million, lower than CAD 56.166 million in Q3FY20. The decline was primarily due to a significantly higher direct cost (CAD 124.785 million v/s CAD 100.687 million in pcp).
• The quarter was marked by an increase in general and administrative expense, while finance cost was lower than the previous corresponding period (pcp).
• The group reported a net profit of CAD 12.407 million, as compared to a net profit of CAD 16.153 million in pcp.

Q3FY21 Income Statement Highlights (Source: Company Report)

Risks: The company reported an increase in input costs which has dampen the company’s profitability, and the continuation of the above trend remains a major challenge for the group.

 Valuation Methodolgy(Illustrative) : Price to Earnings

Stock Recommendation:

In 9MFY21, the company reported a higher dividend of CAD 16.161 million, as compared to CAD 15.430 million in pcp. The above is impressive as most of the companies are lowering their distribution in order to retain liquidity. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like Boyd Group Services Inc, Black Diamond Group Ltd etc. Considering the aforesaid facts, we recommend a 'Speculative Buy' rating on the stock of BDGI at the last traded price of CAD 30.89 on December 22, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

Technical Analysis Summary

One-Year Technical Price Chart (as on December 22, 2021). Analysis by Kalkine Group

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

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