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Badger Daylighting Pitch

Jan 17, 2016

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Badger Daylighting (TSX:BAD) [BUY]

March 14, 2015By: Rohan Sharma, Thomas Yang, Mitchell Li, Yash Patel, David ChanTeam 10

Company Overview

Business OverviewCompetitive AdvantageSegmented AnalysisShare Price PerformanceBadger Daylighting is North Americas largest provider of non-destructive daylighting services.

Primary customers are contractors and facility owners in the utility and petroleum sectors. Other sectors include power generation, transportation, industrial and engineering.

Market Cap: 835.46M P/E 2015E: 16.8x D/E: 0.2 xShare Price: $22.25 EPS 2015E: 1.36 D/A: 36.38%North Americas Largest Hydrovac Fleet 957 unitsFaster response to larger projects using multiple units to get work done

In-house design, R&D, manufacturing62,000 square feet facility to build trucksLower capital cost

Company Overview

How Do Hydrovacs Work?

Company Overview

Highly-Experienced Management Team With Proven Track RecordNamePositionBackgroundTor WilsonGerald Schiefelbein John Kelly CEO/PresidentCFO & VPCOOTor joined Badger in June 2000. Prior position include Senior VP and COO of Timberjack. Timberjack was purchased by John Deere in April 2000.

Gerald joined Badger in June 2014. Prior positions include CFO for Ivanhoe Energy and BP Americas based crude oil and refined products trading organization.John joined Badger as VP, U.S. Operations in September 2011. He was appointed COO after doubling the size of the U.S. company within 3 years.

Industry Overview

Impact of oil crash on Utilities, Energy and Infrastructure IndustriesImpact of the decline in oil prices in negligible on the utilities and Infrastructure sectors.

Industry Overview

Trends in the Utilities SectorUtilities Sector Consolidation ContinuesThe sector has been consolidating consistently over the last few years with deal sizes averaging $15B for an average premium of 20%Consolidation is driven by low-cost capital and the push toward pure-play regulated companiesOther drivers for the trend in aggressive M&A activity include:Cost cutting in a near-zero-growth environmentGrowing size and scale of resources required for large-scale project ordersOil and Gas OutlookLow oil prices may pose a threat to business prospects for small and under-capitalized oilfield-service providers in 2015, while presenting merger and acquisition opportunities for larger and better-capitalized competitorsServicers leveraged to US and Canadian land drilling may be most at risk, as capital spending on exploration and production dropsWhile oil-services companies will likely rein in spending to buy time until a potential oil price recovery, that trend can only last so longDuring this period, well-capitalized will be able to hibernate their way through while the competition thins out in the meantime

Thesis I: Over-Adjustment to Oil Prices

Oil ExposureLow Oil Prices Effect on Badger DaylightingCrude Oil vs. TSX:BAD RegressionAnticipated Oil Price Recovery55% of Badgers clients are tied to the Petroleum-Related Infrastructure and Oil Field Services segment. Management indicates that Badgers pipeline exposure is from larger transmission pipelines as opposed to upstream gathering lines.

Given the nature of the exposure to the oil market, Badger is only affected indirectly by the price of oil. A regression of crude oil vs. TSX:BAD reveals little to no material correlation between the movement of oil and the movement of TSX:BAD.

In addition, Badgers exposure to oil refinery and storage segments are highly inelastic to oil prices due to their necessity-based nature.

Revenue attributed to petroleum is indirectly tied to infrastructure as the U.S. requires more infrastructure development in the future, this demand will increase.

A drop in oil price does not directly affect Badgers firm value since their existing operations are contract-based. If the clients are able to avoid bankruptcy, all contracts will be paid in full.

Thesis II: U.S. Infrastructure Outlook

Favourable U.S. Outlook

US: 66 CitiesCanada: 51 CitiesBadger has shown its ability to significantly expand its U.S. operations in recent years. In the U.S., over 100,000 miles of distribution gas need to be replaced in the coming years. The American Society of Civil Engineers estimates over $3.5T in U.S. infrastructure investment needed by 2020. In addition, over 40,000 miles of pipeline are planned or under construction in 2013 across North America. Capital expenditures for gas infrastructure development are forecast at $205B through 2035.

The growing demand for Badgers services in the U.S. provides attractive upside, and Badger is well-positioned to expand its U.S. market share. Given the expanding U.S. infrastructure spending, Badger Daylighting is well-positioned to drive earnings growth. If Badger is able to maintain its market share in a growing market, the business will be able to drive bottom-line growth. Given Badgers industry-leading position, if it is able to expand its market share through increased efficiency and growing revenue per truck per month, there is tremendous upside.

The U.S. market is largely untapped, and rapid expansion within the southern U.S. would allow revenues to grow exponentially. 000'sFunds Generated from Operations$65,825.00Add: Proceeds on Disposal of Capital Assets$406.00Less: Required Principal Repayments of Long-Term DebtLess: Maintenance CAPEX$3,229.00Cash Available for Growth CAPEX and Dividends$63,002.00

North America-Wide CoverageCash Available for Growth Capex

Thesis III: Adaptability to Environment

Similar Market Slowdown in 2009Buildup in Free Cash FlowStabilization of Hydrovac Units in Crisis TimesNarrowing Valuation PremiumIn the last major decline in oil prices: Badger stabilized the number of hydrovac unitsBadger maintained profitability by adjusting output to optimal levels Reduced build rate substantiallyRe-allocated functional trucks to areas of opportunityMaintained regular dividend payment

When demand slows down, it increases the FCF positionLess growth CAPEX is necessary BAD returns cash to shareholders through increased dividends and/or share buybacks Improve ability to pay interest and principal from debt outstanding

Comparable Companies Analysis

CompanyTickerPriceMkt CapEVP / EP / Cash FlowEV / EBITDAEV / SalesEV / Tangible BVNet Debt / EquityROADiv Yield(MM)(MM)LTM2015E2016ELTM2015ELTM2015E2016ELTM2015EYieldCalfrac Well ServicesTSX:CFW$7.98 763.3 1,419.9 9.5 xnm31.9 x4.6 x2.4 x4.0 x10.3 x5.5 x0.6 x0.8 x1.7 x0.9 x3.6%6.3%Total Energy ServicesTSX:TOT$47.16 423.5 474.8 10.9 x8.6 x17.8 x6.3 x5.9 x4.8 x4.8 x7.2 x1.1 x1.1 x1.3 x0.2 x20%1.8%Lonestar WestTSXV:LSI$2.35 64.7 79.5 106.7 x37.0 x14.2 xnmnm13.8 x10.4 x6.3 x1.7 x1.6 x2.1 x0.2 xnanaMatrix Service CompanyNasdaqGS:MTRX$17.76 597.5 515.3 14.7 x14.5 x10.2 x15.4 x10.8 x6.5 x6.0 x4.0 x0.3 x0.3 x2.1 xnm7.5%naEssential Energy ServicesTSX:ESN$1.09 148.5 204.7 6.2 x30.6 x7.1 x2.9 x3.5 x3.1 x6.1 x3.7 x0.6 x0.8 x0.9 x0.4 x2.6%10.2%Mean 35.5 x20.0 x18.5 x8.8 x6.4 x7.3 x7.9 x5.7 x0.9 x1.0 x1.8 x0.4 x10%4.1%Median12.8 x14.5 x16.0 x6.3 x5.9 x5.7 x8.1 x5.9 x0.9 x1.0 x1.9 x0.2 x7.5%4.1%Badger DaylightingTSX: BAD$22.25$835.5$941.920.0 x16.8 x16.4 x9.3 x8.0 x9.0 x8.2 x7.8 x2.3 x2.2 x5.0 x0.2 x14.8%1.6%

Sensitivity AnalysisEV/EBITDA 2015E6.9 x7.4 x7.9 x8.4 x8.9 x19.0 x$22.49$23.29$24.08$24.88$25.68P/E19.5 x$22.83$23.63$24.42$25.22$26.022015 E20.0 x$23.17$23.97$24.76$25.56$26.3620.5 x$23.51$24.31$25.10$25.90$26.7021.0 x$23.85$24.65$25.44$26.24$27.04

MetricMeanBadger`s DenominatorImpliedEVMkt CapPriceP/E 2015E20.0 x 1.36 $27.20EV/EBITDA 2015 E7.9 x 118.0 $932.20$826.05$22.33Average Price$24.76

Discounted Cash Flow Analysis

BADGER DAYLIGHTING - DCF 2015E 2016E 2017E 2018E 2019E 2019E 2019E 2019E 2019E 2019E (in mm CAD$)FYFYFYFYFYFYFYFYFYFYUnlevered Free Cash Flow$4.6 $13.8 $9.9 $55.5 $69.7 $46.1 $54.4 $62.8 $71.1 $79.5 WACC11.5% Discount Period1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 Discount Factor0.90 0.80 0.72 0.65 0.58 0.52 0.47 0.42 0.38 0.34 Discounted FCF$4.1 $11.1 $7.1 $35.9 $40.4 $24.0 $25.4 $26.3 $26.7 $26.8

2019E EBITDA$207.0 Terminal Multiple8.0x Terminal Value$1,655.7 Discounted Terminal Value$960.7 % of Total EV80.8% Total Enterprise Value$1,188.5 Less: Debt$82.3 Add: Cash$8.6 Total Equity Value$1,114.8 Shares Outstanding 37.04 Fair Value per Share$30.10Upside to Todays Price35.3%

Total Price Per ShareTerminal EBITDA Multiple7.0x 7.5x 8.0x 8.5x 8.5x 10.5% $28.3 $30.0 $31.7 $33.3 $33.3 Discount11.0% $27.5 $29.2 $30.9 $32.5 $32.5 Rate11.5% $26.9 $28.5 $30.1 $31.7 $31.7 (WACC)12.0% $26.2 $27.8 $29.4 $30.9 $30.9 12.5% $25.5 $27.1 $28.6 $30.2 $30.2

Risks and Catalysts

RisksCatalystsCommodity price risk is minimal given the 4% correlation between BADs share price and oil; however an extended commodity slump may have broader implications on BADs overall revenue sourcesThe current commodity slump is a non-recessionary oneUn-patentable hydrovac technology may affect BADs competitive advantage if others are able to also replicate its economics of scale benefitPricing risk due to BADs tendency to keep its prices relatively constant, relying on effective asset mobilization and increasing asset efficiency to compensate and maintain stable marginsCurrency risk due to the possible emergence of an inverse trend with the USD returning to previous levels against the CAD as a 10% in the CAD would decrease EBITDA by 5% (and vice versa)Oil price recovery may help the market correct its overreaction and also slightly boost BADs earnings as wellThe upcoming Q4 2014 earnings announcement on March 18, 2015 will expose the true imp

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