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

• Secured new contracts: 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.

• Robust order backlog: The company's order backlog was at CAD 310.3 million on October 31, 2021, up from CAD 282.5 million on the same date in previous year. Fabrication hours accounted for 40% of the order backlog on October 31, 2021, up from 34% on January 31, 2021. Fabrication hours are the Corporation's mainstay and most valuable operation. The majority of contracts in hand as of October 31, 2021, will be implemented in stages between now and the end of the fiscal year ending January 31, 2023.

• Curtailing long term debt: The company is able to reduce its debt burden sequentially as a result of strong business and excellent cash flows, which is a critical plus. Debt reduction improves the firm's financial flexibility. Additionally, the company's debt to equity ratio in Q3 2022 was 0.22x, which was the lowest in the prior three quarters.

  Source: REFINITIV, Analysis by Kalkine Group 

• 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. Its current Cash Cycle is of 82.5 days, which is the lowest in the last three quarters, is appreciable.

Source: REFINITIV, Analysis by Kalkine Group

Risks associated with investment

ADF's markets are affected by a number of risk and uncertainty factors, which may have an impact on its company, financial status, and operating performance. These dangers and uncertainties include, but are not limited to, global economic problems. Furthermore, an increase in steel costs may be a worry, although this would be mitigated by agreed-upon and integrated in contracts selling price adjustment measures.

Financial overview of Q3 FY2021

Source: Company Filing

• In Q3 2021, the company posted higher revenues up by CAD 63.0 million to CAD 110.1 million, against CAD 47.1 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.
• In the reported period the company’s cost of sales increased to CAD 103.9 million compared to CAD 39.6 million in pcp. The cost of sales as a % of revenue in Q3 2021 stood at 94% compared to 84% in pcp.
• In Q3 2021, the company’s gross profit witnessed a decline to CAD 6.2 million compared to CAD 7.5 million in Q3 2020. Primarily due to rise in cost of sales.
• On the back of higher revenues in Q3 2021, the company managed to post higher net income at CAD 2.7 million, compared to CAD 2.5 million in pcp, partially supported by lower income tax expense.

Stock recommendation 

The firm posted revenues of CAD 110.2 million for the third quarter ended October 31, 2021, compared to CAD 47.2 million in the previous corresponding period. While sales for the first nine months of the fiscal year reached CAD 233.7 million, up by CAD 98.3 million compared to the previous corresponding period, in line with the recent expansion of the order backlog. Whereas, on October 31, 2021, the company's order backlog stood at CAD 310.3 million, up from CAD 282.5 million in the pcp. The firm is also effectively managing its inventories and reducing its long-term debt, which is a huge benefit.

On the valuation front, the stock is available at a TTM EV/ Sales multiple of 0.2x against an industry (Basic Materials) median of 2.2x. Hence, considering the aforesaid rationales and discounted valuations, we recommend a “Speculative Buy” rating in the stock at the closing price of CAD 1.74 on as on April 8, 2022, with double-digit (percentage term) upside potential. 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 April 8, 2022). Source: REFINITIV, Analysis by Kalkine Group 

Technical Analysis Summary

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.