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:

• Diversified Client base: The company caters to a diversified client base ranging from utility, industrial, transportation and construction. Due to the varied nature of businesses of the clients, the company is not dependent on a particular sector and has a balanced risk profile, which is a key positive.
• Improved dividend distribution amidst low profitability scenario: Despite a decline in the company’s net profit, the company reported an improved dividend distribution, which is noteworthy. Notably, in H1FY21, the company reported a dividend distribution of CAD 10.715 million, slightly higher than CAD 10.201 million in pcp.
• Encouraging Targets: The company expects to double its FY20 U.S. income in the next 3-5 years. The group is also focusing on average Adjusted EBITDA growth of 15% from fiscal 2020 in the next 3-5 years, while EBITDA margin is targeted in between 28% to 29%, from 10.6% in Q2FY21 and 8.2% in H1FY21, respectively. Revenue per truck is aimed at CAD 30,000 from ~CAD 26,000 in the recent quarters.

Q2FY21 Income Statement Highlights:

• BDGI announces its quarterly result, wherein the company posted revenue of CAD 135.592 million, as compared to CAD 134.484 million in pcp. Revenue per truck stood at CAD 26,633, compared to CAD 23,458 in pcp.
• Gross profit stood at CAD 26.033 million, lower than CAD 46.432 million in Q2FY21. The decline was primarily due to a significantly higher direct cost (CAD 109.559 million v/s CAD 88.052 million in pcp). The increase in direct costs was primarily due to higher average diesel prices coupled with an increase in labour and fleet related expenses.
• The quarter was marked by an increase in general and administrative expense, while finance cost remained relatively lower than the previous corresponding period (pcp).
• The group reported a net loss of CAD 2.818 million, as compared to a net profit of CAD 1.701 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: Despite an improved revenue performance, the company reported a net loss due to an increase in input costs, and the continuation of the above trend would dent the financial performance.

Valuation Methodology (Illustrative): Price to Cash Flow

Stock Recommendation:

The company has a unique business model and caters to non-destructive excavation services for North America’s key infrastructure, which is resilient in nature. Notably, from 2010 to 2020, the company reported a 15% CAGR in its topline, supported by significant network expansion. The company reported a strong liquidity position with more than CAD 300 million available in terms of cash and credit facility capacity supported by continued improvements in working capital and collection of aged receivables. We have valued the stock using the Price to Cash Flow-based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered the industry median multiple on an NTM basis. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 34.72 on September 03, 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 September 03, 2021). Source: REFINITIV, Analysis by Kalkine Group

Questor Technology Inc.

Questor Technology Inc. (TSXV: QST) is an environmental cleantech company which is active in Canada, the United States, Europe and Asia. It is focused on clean air technologies that improves air quality, supports energy efficiency and greenhouse gas emission reductions.

Key Highlights

• Improving Scenario: Oil and gas prices have begun to rise, and the company anticipates that this would lead to an increase in activity in the energy sector over the following year, which has traditionally provided the company with income.
• Awarded new multi-channel contacts: During this time, the firm established a substantial number of new multi-channel connections, and a number of new outbound and inbound opportunities for both clean combustion and waste heat to power products were created on a weekly basis. This has resulted in an expansion in the size of its pipeline. As the global economy begins to reopen and recover, we expect this trend to continue in the coming year. This would be a significant positive for the firm, as it would increase sales and cash flows.
• Diversifying into new markets: The company is growing its waste heat to power offering and developing digital capabilities focused on an emissions platform as part of its diversification strategy. Recently, it started a Questor clean combustion unit at a biomass plant in Kelowna, British Columbia, that generates renewable natural gas. We believe that through this diversification the company would reduce its reliance on oil and gas clients.
• Strong financial position: The company continues to have a good financial position, with CAD 15.4 million in cash on hand, thanks to cost control and capital discipline. As the economy improves, we believe this robust balance sheet would provide a platform for expanding into new goods and markets.

 Financial overview of Q2 2021 (Stated in Canadian dollars)

Source: Company

• In Q2 2021, the company reported revenue at CAD 1.2 million, increased by 15% compared to CAD 1.0 million in the previous corresponding period. The increase was mainly due to higher equipment sales.
• The company reported higher cost of sales at CAD 1.3 million compared to CAD 1.0 million in the previous corresponding period.
• Due to higher cost of sales the company registered gross loss of CAD 0.12 million compared to a loss of CAD 0.03 million in pcp. The gross loss was largely a result of one-time expenses related to re-locating to a more operationally efficient yard location in Colorado.
• The company posted loss before tax of CAD 1.1 million in the reported period V/s a loss of CAD 1.6 million in pcp.
• Net loss minimized to CAD 0.8 million compared to CAD 1.2 million in pcp.

Risks associated with investments

Global slowdown in macroeconomic environment and a lower crude oil demand offtake are the key risks for the company as it can have significant decline in demand for their equipment and services. 

Valuation Methodology (Illustrative): EV to Sales

Stock recommendation

The company’s financial results for the six months ended June 30, 2021, continued to be impacted by the slowdown in global economic activity. Its revenue in Q2 2021, increased 15% or CAD 0.2 million compared to the same period in 2020. The commodity prices have starting to recover, and activity levels are also improving as economies reopen. This has resulted in increased interest in its technology solutions, and certain jobs that were put on hold during the pandemic are starting up again. A significant number of new multi-channel contacts have been made by the company during the period for both clean combustion and waste heat to power products. Furthermore, the company is diversifying its business into new markets, which would minimize the dependence on oil and gas customers and expand its markets with its waste heat to power offering. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 1.43 as on September 3, 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 September 3, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

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.