Badger Infrastructure Solutions Ltd. (TSX: BDGI) is a Canadian-based company that provides non-destructive excavating services. The key technology of the company is the Badger Hydrovac, which is used primarily for safe excavation around critical infrastructure and in congested underground conditions.

Why Should Investors Book Profit?

• Net losses in FY21: The group reported a net loss of CAD 11.24 million for FY21 as compared to the Net profit of CAD 24.74 million in the FY20. The higher direct costs, increased general and administrative expenses, unrealized loss on the derivatives and lower foreign exchange gains were the key reasons for the company to transition into losses during FY21.

• Declining profit margins sequentially: The company witnessed a decline in its profitability margins on a sequential basis, which is evident in its Q4FY21 Gross Margins of 19.0% as compared to 27.3% in Q3FY21. For the reported period, EBITDA margins dropped to 10.9% vs 21.1% in the previous quarter. Further, the Net Margins turned negative to 3.9% in Q4FY21 as compared to positive net margins of 7.2% in Q3FY21. The declining profitability margins dwarf the prospects of the company's financials, which is not a healthy sign for the investors.

        Source: Refinitive, Analysis by Kalkine Group 

• Declining cash flows and cash balances: The company reported a decline in its cash flows from operations for FY21 to CAD 67.36 million vs CAD 139.25 million in the pcp. Further, the company witnessed a decrease in its cash and cash equivalents balances to CAD 5.24 million in the reported period, as compared to CAD 17.29 million in the FY20. The declining cash balances and cash flows from operations can hamper the further expansion and managing of the day-to-day operations, which might require the company to borrow from external sources, incurring interest costs.
  

 Valuation Methodology (Illustrative): Price to Earnings Multiple based

Stock recommendation

The company delivered a negative return of 0.09% in past one month and a negative return of 16.74% in the past six months. The group reported an increase in its revenues for FY21 to CAD 568.75 million as compared to CAD 558.62 million in FY20. On account of higher costs and other derivatives losses, the group posted a net loss of CAD 11.25 million for the reported period as compared to the Net Income of CAD 24.74 million in the FY20. On the valuation front, the stock is measured on the Price to Earnings based multiple and currently trading at 24.4x which is higher than the industry median (Industrials) of 15.9x, implying the stock is highly overvalued and can underperform as compared to its peers. For the valuation, we have considered Major Drilling Group International Inc., AutoCanada Inc., Trican Well Service Ltd., etc as the peer group for the comparison.

The stock has shown signs of exhaustion from the recent highs of CAD 46.58 in March 2021, and from there the prices moved towards the south, forming lower highs and lower lows. Currently, the stock is facing a strong resistance of  50 DMA around CAD 30, which can push back the stock to further lower levels.

Therefore, based on the above rationale and valuation, we recommend a “Sell” rating at the closing market price of CAD 29.97 on March 18, 2022. 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 March 18, 2022). Source: REFINITIV, Analysis by Kalkine Group

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.