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 highlights 

• Robust guidance: The company is committed to achieving profitable, long-term, and sustainable growth. It plans to increase sales in the United States and grow Adjusted EBITDA by 15% on average over the following 3-5 years, starting in fiscal 2020. It also aims for a 28% to 29% yearly Adjusted EBITDA margin.

• Prudent working capital management: The company is effectively managing its working capital. As of March 31, 2021, it had CAD 32.1 million in working capital, down from CAD 70.5 million as of December 31, 2020. In comparison to Q1 2020, it also reduced receivables to CAD 118 million and days sales outstanding to 77 days in the reporting quarter. A reduced days sales outstanding means that the company is encashing its receivables in a less span of time, which is a key positive.

Source: Company

• Rising cash flow from operating activities: The company reported its cash flow from operating activities in Q1 2021, at CAD 35.8 million, compared with CAD 25.8 million in the previous comparative quarter. The increase in cash flow from operating activities resulted from its ongoing efforts to improve the timely collection of accounts receivables.
  

Financial overview of Q1 2021 – (in thousands of Canadian Dollars)

Source: Company 

• In Q1 2021, the company reported lower revenue at CAD 108.4 million, against CAD 136.6 million in the previous corresponding period. The decline in the revenue was mainly due to e holiday shutdowns related to COVID-19, severe winter storms and reduced oil and gas customer demand.
• The company posted gross profit of CAD 16.9 million, against CAD 30.2 million in pcp. The decline in gross profit was mainly due to lower revenue and higher direct cost which stood at 84.3% of revenue compared to 77.8% in the previous corresponding period.
• Operating loss stood at CAD 17.6 million, against a profit of CAD 9.0 million in pcp.
• The company posted comprehensive loss of CAD 17.4 million compared to a profit of CAD 31.9 million in pcp, primarily due to above stated reasons, partially offset by income tax recovery.
  

Risks associated with investment

Further restrictions by the government might lead to delay in project execution. Moreover, liquidity crunch in the overall economy may impact the trade and other collections. Other risk involved with the company is of foreign exchange risk as it derives significant revenues from the US. 

Valuation Methodology (Illustrative): EV to EBITDA 

Stock recommendation

The company continues to position its operations for the summer construction season as it anticipates market rebound in 2021. In March, the revenue run-rate improved dramatically as the reopening of US economies increased as a result of higher vaccination rates. Furthermore, as the North American economy, particularly the United States, reopens and recovers from the COVID-19 epidemic, the company is seeing early signs of a significant market rebound in 2021. In addition, the firm plans to increase its sales in the United States over the next 3 to 5 years, with annualized Adjusted EBITDA margins of 28% – 29%, which is a significant plus. Based on technical analysis, the stock has support at CAD 29.0 level. Therefore, based on the above rationale and valuation, we recommend a “Speculative Buy” rating on the stock at the closing price of CAD 35.27 on July 9, 2021. We have considered Boyd Group Services Inc, Construction Partners Inc, Ameresco Inc, as the peer group for the comparison. 

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

One-Year Technical Price Chart (as on July 09, 2021). Source: REFINITIV, Analysis by Kalkine Group 

Ag Growth International Inc

Ag Growth International Inc (TSX: AFN) is a leading provider of equipment solutions for agriculture bulk commodities including portable and stationary grain handling, storage and conditioning equipment, belt conveyors, grain storage bins, grain handling accessories, grain aeration equipment and grain drying systems. It has manufacturing facilities in Canada, the United States, Italy, Brazil, and the United Kingdom.

Key highlights

• Delivering sustainable growth: In Q1 2021, the Company continued its momentum, with sales increasing by 11.8% to CAD 256 million on a year-over-year basis, and Adjusted EBITDA increasing by 52.1% to CAD 39.1 million from CAD 25.7 million in the previous corresponding quarter. The Company’s continuous growth in revenue and Adjusted EBITDA was supported by healthy demand and a substantial backlog.

Source: Company

• Firm order backlog: Order intake is still strong, with excellent backlogs indicating that sales growth is on track. This is a sign of the company's business model's newfound resiliency. On a year-over-year basis, the company's farm backlog increased by 75%. Customers' emphasis has resulted in a surge in demand for farm equipment. As of March 31, 2021, the Commercial segment's backlog was up 17% year over year, resulting in a 40% increase in overall backlog.
  

• Improving macros would support future growth: Crop quantities, crop prices, and trade flow are trending upwards, indicating that global macroeconomic circumstances are improving. While crop volumes, trading procedures, and consumption levels are more intimately tied to the company’s demand drivers, the present agricultural pricing situation provides a positive tailwind for its markets. Favorable farm-level conditions in North America would continue to drive demand for its products.
  

Financial overview of Q1 2021 in thousands of CAD

Source: Company

• The Company posted an increase in net sales by 10.7% to CAD 253.7 million, compared to CAD 229.1 million in Q1 2020, mainly due to healthy sales performance from all segments, primarily farm segment and commercial platform in all the geographies, partially offset by the Canada region.
• The Company posted a higher gross profit at CAD 76.0 million in Q1 2021, compared to CAD 61.2 million in pcp, on the back of higher revenue.
• Profit before income tax stood at CAD 18.17 million, against a loss of CAD 57.56 million in pcp. Lower operating expenses mainly supported the improved picture.
• The Company recorded a net income of CAD 12.7 million in Q1 2021, compared to a net loss of CAD 48.8 million in the previous corresponding period, due to the above-stated reason.
  

Risks associated with investment

In the near-term, the rise of steel, component, packaging, and freight costs would pressure the gross margin of the segment. While cost increases can be passed onto customers in many instances, the meteoric rise in steel costs would impact the company’s Q2 and Q3 2021 margins.

Valuation Methodology (Illustrative): EV to EBITDA

Stock recommendation

First-quarter 2021 results include strong contributions from all business segments with consolidated trade sales and adjusted EBITDA up 12% and 52% on YOY basis, respectively. The company is continuously recognizing the benefits of its diversification into new markets and new products. Furthermore, despite the challenges of rising steel price, component, packaging, and freight costs, the company expects strong full-year trade sales and adjusted EBITDA above the FY 2020 levels. Additionally, an order intake continues to be robust with solid backlogs, providing good visibility to sales growth. It's a signal of the resilience now embedded in the company’s business model. Based on technical analysis, the stock has support at CAD 32.0 level. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating on the stock at the closing price of CAD 37.51 on July 09, 2021. We have considered Superior Plus Corp, Savaria Corp, Nutrien Ltd, etc., as the comparison's peer group.

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

One-Year Technical Price Chart (as on July 09, 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.