Badger Daylighting (TSX:BAD) [BUY]
March 14, 2015
By: Rohan Sharma, Thomas Yang, Mitchell Li, Yash Patel, David Chan
Team 10
Company Overview
Overview Thesis Valuation Risks & Catalysts Execution
Business Overview Competitive Advantage
Segmented Analysis Share Price Performance
Badger Daylighting is North America’s 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 America’s Largest Hydrovac Fleet – 957 units• Faster response to larger projects using multiple units to get
work done
In-house design, R&D, manufacturing• 62,000 square feet facility to build trucks• Lower capital cost
Oil & Gas55%
Utilities & Other45%
•Power Generation (nuclear, coal, wind, solar)
•Transportation (rail, airports, roads)
•Industrial (manufacturing, processing, buildings)
•Engineering (transportation, environmental, civil)
Other
January 2013 July 2013 January 2014 July 2014 January 20150
100
200
300
400
500
215.3
117.5
Badger Daylighting S&P/TSX Composite Index
Company Overview
Overview Thesis Valuation Risks & Catalysts Execution
How Do Hydrovacs Work?
Company Overview
Overview Thesis Valuation Risks & Catalysts Execution
Highly-Experienced Management Team With Proven Track Record
Name
Position
Background
Tor WilsonGerald
Schiefelbein John Kelly
CEO/President CFO & VP COO
Tor 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 America’s 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
Overview Thesis Valuation Risks & Catalysts Execution
Impact of oil crash on Utilities, Energy and Infrastructure Industries
2/19/2014 5/19/2014 8/19/2014 11/19/2014 2/19/201540%
50%
60%
70%
80%
90%
100%
110%
120%
130%
106%
113%115%
93%
118%
iShares US Utilities Index S&P 500 Energy Sector Index Canadian Infrastructure & Utilities IndexCrude Oil North America Infrastructure Index
Impact of the decline in oil prices in negligible on the utilities and Infrastructure sectors.
Industry Overview
Overview Thesis Valuation Risks & Catalysts Execution
Trends in the Utilities Sector Utilities Sector Consolidation Continues
- The 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 companies
- Other drivers for the trend in aggressive M&A activity include:- Cost cutting in a near-zero-growth environment- Growing size and scale of resources required for large-scale
project orders
Oil and Gas Outlook
- Low 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 competitors
- Servicers leveraged to US and Canadian land drilling may be most at risk, as capital spending on exploration and production drops
- While oil-services companies will likely rein in spending to buy time until a potential oil price recovery, that trend can only last so long
- During this period, well-capitalized will be able to hibernate their way through while the competition thins out in the meantime
Q1
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Q1
2010 2011 2012 2013 2014 2015
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Deal Size Deal Count
Deal S
ize (
$ B
illio
ns)
Deal C
ount
Thesis I: Over-Adjustment to Oil Prices
Overview Thesis Valuation Risks & Catalysts Execution
Oil Exposure Low Oil Price’s Effect on Badger Daylighting
Crude Oil vs. TSX:BAD Regression Anticipated Oil Price Recovery
55% of Badger’s clients are tied to the Petroleum-Related Infrastructure and Oil Field Services segment. Management indicates that Badger’s 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, Badger’s 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 Badger’s firm value since their existing operations are contract-based. If the clients are able to avoid bankruptcy, all contracts will be paid in full.
-0.1 -0.05 2.77555756156289E-17 0.05 0.1 0.15
-0.15
-0.1
-0.05
0
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0.15
f(x) = 0.000703857567870475 ln(x) + 0.00500008324145837f(x) = 0.145965067374256 x − 0.00106174236144776R² = 0.0384552057925095
Badger Daylighting Daily Return
Crud
e O
il D
aily
Ret
urn
Mar-15 Mar-16 Mar-17 Mar-18 Mar-19 Mar-20 $40
$45
$50
$55
$60
$65
$70
$75
$80
$68.02
$76.24
WTI Futures Brent Futures
Thesis II: U.S. Infrastructure Outlook
Overview Thesis Valuation Risks & Catalysts Execution
Favourable U.S. Outlook
US: 66 Cities
Canada: 51 Cities
Badger 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 Badger’s 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 Badger’s 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 Coverage Cash Available for Growth Capex
Thesis III: Adaptability to Environment
Overview Thesis Valuation Risks & Catalysts Execution
Similar Market Slowdown in 2009 Buildup in Free Cash Flow
Stabilization of Hydrovac Units in Crisis Times Narrowing Valuation Premium
In the last major decline in oil prices: • Badger stabilized the number of hydrovac units• Badger maintained profitability by adjusting output to optimal
levels • Reduced build rate substantially• Re-allocated functional trucks to areas of opportunity• Maintained regular dividend payment
When demand slows down, it increases the FCF position• Less 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
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 3/4 -
200
400
600
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1,000
1,200
136 162 184 185 212 241 285 334 313407 412
504630
791
957
March-13 July-13 November-13 March-14 July-14 November-14 March-155.0x
7.5x
10.0x
12.5x
15.0x
7.9x
6.2x
9.4x
7.0x
Badger Daylighting (NTM EV/EBITDA) Comparable Companies (NTM EV/EBITDA)Avg. Badger Daylighting (NTM EV/EBITDA) Avg. Comparable Companies (NTM EV/EBITDA)
Comparable Companies Analysis
Overview Thesis Valuation Risks & Catalysts Execution
Company Ticker Price Mkt Cap EV P / EP / Cash Flow
EV / EBITDA EV / SalesEV /
Tangible BVNet Debt /
EquityROA
Div Yield
(MM) (MM) LTM 2015E 2016ELTM
2015E LTM 2015E 2016E LTM 2015E Yield
Calfrac Well Services TSX:CFW $7.98 763.3 1,419.9 9.5 x nm 31.9 x 4.6 x 2.4 x 4.0 x 10.3 x 5.5 x 0.6 x 0.8 x 1.7 x 0.9 x 3.6% 6.3%
Total Energy Services TSX:TOT $47.16 423.5 474.8 10.9 x 8.6 x 17.8 x 6.3 x 5.9 x 4.8 x 4.8 x 7.2 x 1.1 x 1.1 x 1.3 x 0.2 x 20% 1.8%
Lonestar West TSXV:LSI $2.35 64.7 79.5 106.7 x 37.0 x 14.2 x nm nm 13.8 x 10.4 x 6.3 x 1.7 x 1.6 x 2.1 x 0.2 x na na
Matrix Service Company NasdaqGS:MTRX $17.76 597.5 515.3 14.7 x 14.5 x 10.2 x 15.4 x 10.8 x 6.5 x 6.0 x 4.0 x 0.3 x 0.3 x 2.1 x nm 7.5% na
Essential Energy Services TSX:ESN $1.09 148.5 204.7 6.2 x 30.6 x 7.1 x 2.9 x 3.5 x 3.1 x 6.1 x 3.7 x 0.6 x 0.8 x 0.9 x 0.4 x 2.6% 10.2%
Mean 35.5 x 20.0 x 18.5 x 8.8 x 6.4 x 7.3 x 7.9 x 5.7 x 0.9 x 1.0 x 1.8 x 0.4 x 10% 4.1%
Median 12.8 x 14.5 x 16.0 x 6.3 x 5.9 x 5.7 x 8.1 x 5.9 x 0.9 x 1.0 x 1.9 x 0.2 x 7.5% 4.1%
Badger Daylighting TSX: BAD $22.25 $835.5 $941.9 20.0 x 16.8 x 16.4 x 9.3 x 8.0 x 9.0 x 8.2 x 7.8 x 2.3 x 2.2 x 5.0 x 0.2 x 14.8% 1.6%
Sensitivity Analysis
EV/EBITDA 2015E
6.9 x 7.4 x 7.9 x 8.4 x 8.9 x
19.0 x $22.49 $23.29 $24.08 $24.88 $25.68
P/E 19.5 x $22.83 $23.63 $24.42 $25.22 $26.02
2015 E 20.0 x $23.17 $23.97 $24.76 $25.56 $26.36
20.5 x $23.51 $24.31 $25.10 $25.90 $26.70
21.0 x $23.85 $24.65 $25.44 $26.24 $27.04
Metric Mean
Badger`s Denominator
Implied
EV Mkt Cap PriceP/E 2015E 20.0 x 1.36 $27.20
EV/EBITDA 2015 E 7.9 x 118.0 $932.20 $826.05 $22.33Average Price $24.76
Discounted Cash Flow Analysis
Overview Thesis Valuation Risks & Catalysts Execution
BADGER DAYLIGHTING - DCF 2015E 2016E 2017E 2018E 2019E 2019E 2019E 2019E 2019E 2019E (in mm CAD$) FY FY FY FY FY FY FY FY FY FY
Unlevered Free Cash Flow $4.6 $13.8 $9.9 $55.5 $69.7 $46.1 $54.4 $62.8 $71.1 $79.5
WACC 11.5%
Discount Period 1.00 2.00 3.00 4.00 5.00 6.00 7.00 8.00 9.00 10.00 Discount Factor 0.90 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 Multiple 8.0x
Terminal Value $1,655.7
Discounted Terminal Value $960.7 % of Total EV 80.8%
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 Price 35.3%
Total Price Per Share
Terminal EBITDA Multiple
7.0x 7.5x 8.0x 8.5x 8.5x
10.5% $28.3 $30.0 $31.7 $33.3 $33.3
Discount 11.0% $27.5 $29.2 $30.9 $32.5 $32.5
Rate 11.5% $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
Overview Thesis Valuation Risks & Catalysts Execution
Risks
Catalysts
- Commodity price risk is minimal given the 4% correlation between BAD’s share price and oil; however an extended commodity slump may have broader implications on BAD’s overall revenue sources
- The current commodity slump is a non-recessionary one- Un-patentable hydrovac technology may affect BAD’s competitive advantage if others are able to also replicate its economics of scale
benefit- Pricing risk due to BAD’s tendency to keep its prices relatively constant, relying on effective asset mobilization and increasing asset
efficiency to compensate and maintain stable margins- Currency 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 BAD’s earnings as well
- The upcoming Q4 2014 earnings announcement on March 18, 2015 will expose the true impact of the oil price decline on BAD’s bottom line as well as the year/year comparisons versus Q4/13’s rough winter
- The gradual transition in revenue mix positions the business well to pick up on macro demand headwinds
- Increased consistency in revenue per truck per month
2005 2006 2007 2008 2009 2010 2011 2012 2013 YTD $20,000
$25,000
$30,000
$35,000
$40,000
Revenue Per Truck Per Month
Execution
Overview Thesis Valuation Risks & Catalysts Execution
Argument I: Over-Adjustment to Oil Prices
Argument II: U.S. Infrastructure Outlook
Argument III: Adaptability to Environment
Investment ThesisRecommendation: Buy and Hold
Entry Price:
Price March 13:
Target Price:
$22.25Market Price
$29.00
Dividend Return: 1.60%
Appendix
Appendix
Appendix