This Industrial Doesn’t Pass My Tests…

Badger Daylighting is North America’s largest provider of non-destructive excavating services. The company caters to diverse markets including oil and gas, energy, industrial, construction, transportation, and others. It also serves government agencies within Canada and the U.S. Badger provides a wide range of services including daylighting, utility pole holes, slot trenching, service pits, etc. It provides excavating services through two distinct business methods, Badger corporate operations, and operating partners which include franchisees in the US and agents in Canada.

With more than 25 years of experience under its belt, Badger is known for providing the safest form of non-destructive excavation in the industry and can excavate in a variety of soil types and environmental conditions. The company’s key technology is the Badger hydrovac, which is used primarily for digging safely in congested grounds and challenging conditions. The company is in a good position to benefit from increased infrastructure and construction activity levels in the U.S. and organic growth opportunities in the majority of its other markets.

Investment Data

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Revenue Growth & Market Exposure

Badger runs the largest hydrovac excavation fleet in North America with over 1300 vacuum trucks and an extensive service coverage network throughout Canada and the USA. Badger serves a broad customer base across a diverse range of infrastructure end-use markets. It derived 38% of its 2019 revenues from utilities, 23% from petroleum, 16% from construction, and the balance from industrial, transportation, and telecom markets. The company has significantly reduced its dependence on the oil and gas market accounting for just over 20% of its revenues as opposed to more than 50% of revenues five years ago.

The company builds both custom as well as purpose-built hydrovac trucks. Badger Hydrovac has gained a reputation in the hydro-excavation category given its consistent performance over traditional mechanical excavation. It is uniquely positioned to respond to changes in regional customer service requirements given its large hydrovac fleet and branch network.

COVID-19 negatively impacted Q1 2020 results. Hydrovac and related services were designated as essential services. Badger curtailed hydrovac production and capital expenditures to protect its strong financial position and optimize fleet utilization. It also undertook significant business restructuring activities throughout the second quarter of 2020. The company is well-positioned to gain from its leading position and tap the large market opportunity in the U.S. Badger is targeting to double the U.S. business revenue from FY2019 levels over a period of 3-5 years. It is expecting target revenue per truck per month to over $30,000 in the long-term from the current levels of ~$25,000 in the US and ~$22,000 in Canada. The company’s revenues have grown at a rate of 17% CAGR in the last ten years and US revenues have registered a growth of 25% CAGR.

Dividends

Badger sports an annual yield of 1.6% and a reasonable payout ratio of 53%. It last raised its dividend by more than 5% and its three-year dividend growth CAGR stands at 14%. The company’s NCIB program expired in May this year, but it has not renewed the program given the uncertainty in the economy and financial markets.

Badger is targeting annual adjusted EBITDA growth of 15% on average over 3-5 years. It has taken actions to reduce its direct operating costs by ~$15 million and G&A costs by ~$10 million. With the reputation of a premier engineering solutions partner, clients trust Badger for delivering complex solutions on time. The company’s extensive operating network has enabled delivering value to customers across a wide range of end uses and geographic markets. Badger is also looking at expanding into new geographic areas. Over the past several years, Badger has made significant investments in its business, including the implementation of a new ERP and expanding its internal capabilities. A leading position in engineering and design often results in Badger winning significant contracts in various sectors.

Badger continues to focus on optimizing its fleet to minimize the impact on its business. An unparalleled operational scale, fleet utilization and cost efficiencies are its biggest competitive advantages.

Competition

Badger Daylighting operates in highly competitive markets both in Canada and internationally. It faces competition from large, mid-size as well as smaller companies. It competes with the likes of Stantec, which is a leading global design and consulting firm ranking No.3 in North America and 10th globally. Badger competes with the likes of Bird Construction, WSP Global, SNC- Lavalin, Stantec, and Aecon Group. Key differentiators for Badger include industry expertise, scale, and technology capability.

Bottom Line

Badger stands a good chance to benefit from crucial projects and infrastructure for a positive recovery. It should benefit from its leading reputation as engineering and technology changes continue to drive the world. The company’s focus on continuous improvements including fleet optimization should position it well to capture operational benefits of increased scale and reduction in operating costs.

The poor Chowder Score makes this stock a pass and the S&P500 ETF is probably a better bet with a similar yield.