ZCL Report 121806 4pm

Equity Research
- Canada
Industrial
Special situ
situaa tions
ZCL Composites Stock Rating:

MARKET PERFORM 3
(ZCL-T, C$10.70)
6-12 Month
Lined Up for Growth Target Price: C$11.30
Financial Summary OVERVIEW

(1)
2006E 2007E 2008E
We are initiating coverage of ZCL Composites (ZCL) with a
(2)
EPS $0.26 $0.40 $0.47 MARKET PERFORM rating and a 6-12 month target price of
P/E 41.0x 26.6x 22.7x
Revenue (mln) $56 $70 $80 $11.30. ZCL is a leader in the design, manufacture and distribution of
EBITDA (mln) $10 $16 $18 high quality, cost-effective liquid storage systems in the Canadian
EBITDA Margin 18.2% 22.2% 23.1%
EV/EBITDA 23.2x 15.3x 12.9x marketplace. Known for its technology leadership, ZCL utilizes
Market Capitalization (mln) $240 fiberglass reinforced plastic (FRP) to produce a host of products
Total Net Debt (mrq, mln) -$1
including: underground storage tanks, aboveground storage tanks,
Enterprise Value (mln) $239
Total Net Debt/Equity (mrq) 0.0x home heating oil tanks, oil-water separators, piping and other
Total Net Debt/Trailing EBITDA (mrq) n.m. customized containment products. ZCL also manufactures a 3-
Book Value Per Share (mrq) $1.26
Diluted Shares Outstanding (mln) 22.4 dimensional glass fabric (Parabeam), which is an integral component
All figures in C$ unless otherwise noted. to both its legacy products and the company’s emerging tank lining
(1) Pro forma December 31 year end estimate
(2) From continuing operations
business.
We believe ZCL is on the cusp of a multi-year period of high growth
Company Description:
and corresponding margin expansion. In the near term, this will be
Based in Edmonton, Alberta, ZCL Composites
engages in the manufacture and distribution of driven by the company’s recently approved secondary containment
liquid storage systems. The company designs and tank lining products—which represent a paradigm shift within the
fabricates underground and aboveground storage
tanks and related products and accessories, home industry. These products have worldwide appeal, offer a very
heating oil tanks, and oilfield tanks. ZCL also attractive customer value proposition, and are relatively scalable.
manufactures a 3-dimensional glass fabric used
for lining both new tanks and existing tanks on- The annual market for secondary containment tank lining is
site. The company predominately serves the estimated to be in excess of $300 million in North America alone. A
downstream and upstream sectors of the
petroleum industry, with additional products second wave of growth kicks in for ZCL when a technology licensing
offered to residential homeowners and various agreement expires in 2009 and the company is free to sell its
industrial and commercial customers. ZCL has
manufacturing facilities throughout Canada and ‘industry standard’ underground storage tanks in the U.S. Having
currently employees approximately 250 people. existing relationships with numerous multinational energy companies
and a cost advantage relative to its U.S. peers, we believe ZCL is
well-positioned for market share gains south of the border.
Steven Turner, P.Eng.
(604) 659-8280
steven.turner@raymondjames.ca
December 18, 2006 PLEASE SEE END OF REPORT FOR IMPORTANT DISCLOSURES
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2 Raymond James Equity Research - Canada

ZCL Composites (ZCL-T)
Other important points to note include:
$12
• Stable customer base. ZCL’s entrenched relationships with numerous blue
chip customers in the petroleum sector has culminated in the company
$10 controlling an estimated 90% of the retail underground tank market in
Canada. This is reflected in ZCL’s extensive list of long-term sales
$8 agreements with both majors and independents. This provides strong sales
visibility for at least the next 3 to 5 years and acts as a platform for
launching initiatives into higher growth markets.
$6
• Leading-edge technology. ZCL has deep technical expertise in

composites and has fostered a culture of innovation. Combined, this enables
$4
ZCL to produce products that are stronger, lighter, and higher in quality than
its competitors. ZCL’s unwavering commitment to technology will, in our
$2
view, ensure a pipeline of innovative products, for both existing and emerging
markets for years to come.
$0
Volume (000s)
• Cost leadership and low capital intensity. ZCL’s unique product designs,
2000
1000
manufacturing scale and operational excellence all contribute to the company
0 achieving a competitive cost advantage relative to its peers. Specifically,
ZCL-T Relative to S&P/TSX Composite
1,535
management estimates that ZCL has at least a 25% cost advantage over
1,035
535
U.S. FRP tank fabricators, due in part, to a sizable reduction in the amount
35 of raw material used in each ZCL tank. Additionally, ZCL’s production
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facilities operate very efficiently (scrap rates, for example, are reportedly
less than 0.05%) with low capital intensity. This latter point is reflected in
ZCL’s current upgrade of its Edmonton facility, where an estimated $1.5
million capital investment is expected to produce an additional $7 million in
annual incremental revenue.
• Financial strength. ZCL has a solid balance sheet with no debt. The
company’s sound financial health provides it with flexibility for opportunistic
acquisitions. Specifically, we believe the fragmented upstream petroleum
tank market and the U.S. retail underground tank market offer select
acquisition opportunities. With respect to the latter, an acquisition of Xerxes
Corporation (a licensor to ZCL), would allow for immediate access to the
retail UST market south of the border.
• Financial Forecasts. We estimate revenue of $70.0 million and $80.2
million for 2007 and 2008, respectively, up from our $56.5 million estimate
for calendar 20061. We expect these gains will come primarily from the
commercial rollout of ZCL's tank lining products. As the company's product
mix shifts towards high margin tank lining, we expect ZCL's gross margin
will come in at 27.1% in 2007, implying an impressive 390 bps increase over
our 2006 estimate of 23.2%, and then rise a further 90 bps to 28.0% in 2008.
Turning to the bottom line, our analysis yields respective diluted EPS of
$0.40 and $0.47 for 2007 and 2008, up from our 2006 estimate of $0.26.
Finally, given the challenge of modeling emerging products such as tank
1 In early 2006 ZCL changed its fiscal year end from March 31 to December 31 and therefore our reference to 2006
refers to our pro forma calendar 2006 estimates.
Raymond James Equity Research - Canada 3

lining and the looming revenue contribution from underground tank sales to
the U.S., we also constructed three scenarios that we believe best capture
the range of expected financial projections for ZCL out to 2010—namely a
conservative, base case, and optimistic scenario.
• Valuation. To derive our target price we have elected to value each of the
said scenarios by: (i) applying a 12.0 times EV/EBITDA multiple to our
respective 2010 EBITDA estimates; (ii) discounting these values back three
years at 15%; and (iii) assigning probability weightings to each scenario. This
analysis yields a weighted-average target price of $11.30 for ZCL common
shares. On a P/E basis, our target price implies 28.3 times and 24.0 times our
respective EPS estimates for 2007 and 2008.
• Recommendation. With ZCL's stock soaring over 70% in the last two
months, our investment conclusion is that the company's share price now
largely accounts for the growth prospects assumed in what we deem as our
most probable scenario, namely our base case. Beyond (i) the securing of
larger and sooner-than-expected tank lining contracts; (ii) the announcement
of a material acquisition (such as Xerxes); or (iii) ZCL becoming a takeout
target itself, we do not see any significant catalysts to take the stock higher
at this time. This, in effect, is what compels us to take a neutral stance on the
stock. Less risk-adverse investors who place a higher probability on the
aforementioned catalysts occurring sooner rather than later could rationally
justify buying ZCL shares at their current level. However, in the interest of
being conservative and balanced, we prefer to wait for either some reduction
in the execution risk associated with tank lining or for some share price
weakness before aggressively backing the purchase of this stock. In the
meantime, we rate the shares MARKET PERFORM.

COMPANY PROFILE
ZCL is the ZCL is the undisputed leader in the design, manufacture and distribution of high
undisputed leader quality, cost-effective liquid storage systems in the Canadian marketplace.
in liquid storage Fiberglass reinforced plastic (FRP) is the core building block material used in
systems in Canada the majority of ZCL’s product offering. Known for its technology leadership,
ZCL utilizes this highly durable yet exceptional lightweight material to produce
a host of products including: underground storage tanks (USTs), aboveground
storage tanks (ASTs), home heating oil tanks, oil-water separators, piping and
other customized containment products. ZCL also manufactures a 3-
dimensional glass fabric (Parabeam), which is an integral component to both its
legacy products and the company’s emerging tank lining business. While the
company predominately serves the downstream (retail) and upstream
(production) sectors of the petroleum industry (approximately 80% of revenue
in F2006), products are also offered to residential homeowners and various
industrial and commercial customers including: mining and pulp and paper
companies, chemical and food processing plants, aquaculture facilities, utility
companies, and engineering firms (see Exhibit 1). As of F2006, the company
began reporting operating results by two segments, namely: Liquid Containment
Storage Systems and Home Heating Oil Tanks. ZCL currently has
approximately 250 employees.
EXHIBIT 1: ZCL F2006 REVENUE BY PRODUCT LINE
Tank Lining
1%
Parabeam
3%
Home Heating Oil
3%
Industrial/Commercial
12%
Upstream Petroleum
14%
Retail Petroleum
67%
Source: Company documents, RJ Research estimates and analysis
Corporate Background
The company has a Founded in Edmonton in 1987, ZCL quickly began expanding its manufacturing
monopoly-like capabilities and now operates facilities across Canada. In total, ZCL currently
position in Canada’s has over 160,000 square feet of office and manufacturing space with locations
tank business in Alberta (four), Quebec, Nova Scotia, and the Netherlands (Parabeam
Industries BV, see Exhibit 2). This national presence in Canada, combined with
a simply superior product (Canada’s first double-walled FRP tank) and a
driven, entrepreneurial management team, culminated in ZCL ultimately
obtaining a near monopoly-like position in Canada’s tank business—with an

estimated 90% share of the Canadian major and independent oil UST market.
ZCL’s market share gains are reflected in the company’s respectable sales
growth. Over the past nine years, revenue has climbed from $24.6 million in
F1998 to $46.2 million in F2006—representing a CAGR of 8.2 % (see Exhibit 3).
EXHIBIT 2: ZCL MANUFACTURING FACILITIES

Location Size (Sq. Ft.) Focus
Edmonton, Alberta (Main Facility) 30,000 FRP upstream and downstream
Edmonton, Alberta (Everlast) 25,000 Steel upstream and downstream
Edmonton, Alberta (Triple M) 30,000 Oversized FRP for upstream
Drummondville, Quebec 45,000 FRP downstream
Waverly, Nova Scotia 16,000 Home heating oil
Nisku, Alberta 6,000 Steel upstream and downstream
Helmond, The Netherlands 10,000 Parabeam
EXHIBIT 3: ZCL HISTORICAL REVENUE GROWTH (F1998-F2006)
50,000
45,000
CAGR: 8%
40,000
35,000
Annual Revenue ($ thousands)
30,000
25,000
20,000
15,000
10,000
5,000
-
F1998 F1999 F2000 F2001 F2002 F2003 F2004 F2005 F2006
Last year’s ZCL’s growth is partly attributable to a series of well-timed acquisitions that
acquisition of Triple have both increased market share and expanded the company’s product mix
M Fiberglass gave (see Exhibit 4). One of ZCL’s more recent, and meaningful, acquisitions was
ZCL exposure to the
that of Triple M Fiberglass in April 2005. In addition to providing cross selling
oil sands and select
opportunities and additional manufacturing capacity, Triple M’s custom
international markets
fiberglass products provided ZCL with exposure to both northern Alberta’s oil
sands as well as select international markets.

EXHIBIT 4: ZCL ACQUISITION HISTORY (1994-2005)
Year Acquisition
1994 CAE Fibreglass Ltd. - ZCL's main competitor based in Quebec
1996 McIntosh Supply Ltd. and ISL Ltd. - two petroleum handling equipment distributors (since divested)
1998 LeGay Fibreglass Limited - custom fibreglass tank manufacturer based in Nova Scotia
2002 Mocoat Services Inc. - manufacturer of tank lining and secondary containment systems based in Alberta
2004 Durex Steel and Alloy Ltd. - steel tank fabricator based in Alberta
2005 Triple M Fibreglass Ltd. - manufacturer of custom fibreglass tanks, vessels and piping
ZCL fought an By no means has the ZCL story been entirely smooth sailing. Indeed, as the
exhaustive litigation company has had its fair share of challenges and setbacks. Most notably, in the
battle with Xerxes late 1990s ZCL fought an exhaustive litigation battle with Xerxes Corporation
Corporation in the of Minneapolis, MN. Court action against ZCL was brought on following the
late 1990s company’s establishment of a manufacturing facility in the Philippines and a
short, but highly successful, sales expansion into the U.S. Xerxes, who licences
technology to ZCL, was able to argue successfully that the licensing
agreement prohibits ZCL from selling USTs outside the Canadian market. In
May 2000, ZCL ultimately conceded and entered into a settlement agreement
with Xerxes. While the terms of the agreement restrict ZCL’s UST sales to
within Canadian borders until December 31, 2008, it is important to note that
ZCL is free to sell both its ASTs and tank lining products without any
geographic restrictions.
Management and Ownership

Mr. Côté has ZCL’s founder, Venence (Ven) Côté has held the role of Chief Executive
accumulated a Officer since the corporation’s inception in 1987—as well as President since
wealth of technical, 1989. Including an 18-year stint at CAE Fibreglass Ltd., Mr. Côté has
operational and accumulated a wealth of technical, operational and managerial experience in
managerial his 35 plus years in the composites industry. In addition, Mr. Côté is recognized
experience
by his peers within the industry as a passionate, competitive and principled
individual. Combined, we believe these traits will go a long way toward leading
ZCL into a new era of exceptional growth potential.
Bernie Lafferty was appointed Chief Financial Officer and Corporate
Secretary in November 2005. Mr. Lafferty brings over 29 years experience in
public accounting, senior finance and executive administration, including
experience in public and privately held companies both in Canada and the
United States. Mr. Lafferty holds an MBA from the University of Toronto and
received his C.A. designation in 1976.
ZCL became a publicly traded company in 1995, listing 5.5 million shares on
the Toronto Stock Exchange at $5.00 per share. Today, the company has
approximately 20.9 million common shares, 0.5 million options (weighted
average exercise price of $1.66 per share), and 0.5 million warrants (exercise
price of $0.95 with an expiration date of August 2007) outstanding. ZCL is
approximately 38% institutionally-owned with the top five institutional holders

owning about 31% of the outstanding shares. Directors and executive officers
of the corporation directly own about 5% of the company's shares2. ZCL's
average daily trading volume over the last year is 55,500 per day. Based on a
recent stock price of $10.70, ZCL's market capitalization is currently $240
million.
2 Director’s Rod Graham and Simon Sochatsky also have indirect beneficial interests in ZCL through their respective
ownership stakes in Northern Plains Capital Corporation and Quattro Capital Inc.

INVESTMENT PERSPECTIVE
Over the last two months, ZCL’s share price has appreciated sharply on the
back of strong quarterly results, tank lining regulatory approval, and two trial
tank lining contracts. While the company has clearly caught the attention of
investors, several aspects of the ZCL story remain largely untold, in our view.
Our investment thesis, presented below, will illuminate the opportunities and
challenges that the company faces.
Petroleum Downstream (Retail Market)

The retail The lion’s share (roughly 67% of revenue in F2006) of ZCL’s business is in the
petroleum market fabrication and sale of fuel storage tanks to the retail petroleum market (i.e.,
accounts for retail gas stations). ZCL markets its retail USTs under the Prezerver® and
approximately two- Greentank® trade names (see Exhibit 5). Through the acquisition of Durex
thirds of revenue Steel in 2004, ZCL also sells steel and fibreglass-lined steel ASTs to the retail
market. At locations where real estate is not at a premium, such as rural gas
stations, ASTs are often the preferred means of fuel storage.
EXHIBIT 5: ZCL RETAIL PETROLEUM UNDERGROUND TANK
Source: RJ Research estimates and analysis

Canada
Non-traditional The annual fuel retailing tank market is currently estimated at $35 million. The
retailers represent retail customer base is well represented by large integrated players like Imperial
a modest growth Oil (Esso), Shell Canada, and Petro-Canada. There are, however, a number of
area for new UST independent petroleum retailers that do not operate refineries, or sell under an
sales integrated company’s banner. Some of the largest of the independents include:
Crevier, Alimentation Couche-Tard (ATD.B-T; Under Review) and Parkland
(PKI.UN-T; MARKET PERFORM). Finally, a new breed of independent
retailer has emerged in recent years, namely ‘Big Box’, or non-traditional
retailers such as Costco, Canadian Tire (CTC.A-T; MARKET PERFORM) and
Loblaws. This style of station in particular, represents a modest growth area for
new UST sales.
Over the years, ZCL has developed entrenched relations with the ‘who’s who’
of Canada’s petroleum industry. The numerous long-term sales contracts that
the company currently has in place provides compelling evidence of this (see
Exhibit 6).
EXHIBIT 6: ZCL LONG TERM SALES AGREEMENTS
Customer Term
Canadian Tire Open-ended
Chevron Canada Open-ended
Alimentation Couche-Tard Open-ended
Petro-Canada Three-year contract extension expiring February 2007
Wilson Fuels Four year contract expiring March 2009
Shell Canada Six-year contract expiring March 2010
Imperial Oil Six-year contract expiring April 2010
Service station One of the more notable trends in fuel retailing, which has a direct impact on
closures have had longer-term tank sales, has been the rationalization of sites. In a response to
a negative impact declining margins, operators have been consolidating and/or closing stations
on tank sales since Canada’s peak station count of just over 20,000 in 1989. As illustrated in
Exhibit 7, retail outlets have been declining at an average annual rate of about
2%. Recent data collected by MJ Ervin & Associates suggests that the long
period of network rationalization may finally be coming to an end, as station
counts appear to now be stabilized at just over 14,000.
If station counts are used solely as a proxy for new tank sales, this data
suggests that ZCL faces very little long-term growth in the retail UST market.
There are, however, numerous drivers that counter this trend, and as a result,
will support modest (5%) sales growth, in our view. Three of the more
significant of these include: (i) environmental regulations; (ii) liability risk
management/corporate responsibility; and (iii) emergence of alternative fuels.

EXHIBIT 7: ANNUAL CANADIAN STATION COUNT (1988 – 2005)
22,000
20,000
18,000
Station Count
16,000
14,000
12,000
10,000
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
Source: MJ Ervin & Associates, RJ Research estimates and analysis
Environmental Regulations
Tank replacement Groundwater is used as a source of drinking water by approximately 25%-30%

and tank lining of Canadians, particularly in the Maritimes and rural communities. In addition
help to mitigate to domestic use, groundwater is also widely used in industrial and
soil and manufacturing processes and for agricultural purposes. Given that leaking
groundwater USTs pose a serious threat to groundwater contamination (and soil
contamination contamination) environmental legislation historically has been, and will continue
to be, a driver behind the replacement and/or in-situ retrofit (tank lining) of
USTs. In Canada, environmental protection of private and commercial lands
(regulations to mitigate soil and groundwater contamination) is a provincial
responsibility. Regulations vary widely amongst the provinces—with PEI
considered to have the strictest regulations and BC the weakest. Common to
most provincial regulations is the promotion of: (i) the removal of older, high
risk tanks (single-walled, unmonitored steel tanks); (ii) use of secondary
containment (i.e., double-walled tanks); (iii) leak detection monitoring (i.e., leak
detection either between the walls of double-walled tanks [interstitial
monitoring] or fuel inventory monitoring); and (iv) soil and groundwater
monitoring via wells/drill samples. Another general trend is that regulations tend
to get stricter as they are revised and updated, as opposed to laxer—thereby
further driving new tank sales.
Liability Risk Management

Environmental regulations are, in many respects, the minimum standard that
must be met to avoid site contamination. Given that owners are responsible for
assessment and clean-up costs—which can run into the hundreds of thousands
of dollars at a highly contaminated site—owners are typically much more

proactive in mitigating their exposure by upgrading their tank networks beyond
what regulations require. A rigorous UST monitoring and replacement policy is
also viewed very favourably by lenders (in the case of land that is not owned
outright) and insurance underwriters—leading to cost savings through better
borrowing rates and insurance premiums.
ZCL tanks “will ZCL’s tanks go a long way to reducing liability exposure related to fuel leakage.
never rust” In fact, one of ZCL’s key selling features of its FRP tanks is that they simply
“will never rust”. ZCL is so confident in the integrity of its tanks they are sold
with a 30 year warranty. ZCL also offers an extended warranty that provides
$2 million in pollution protection for a period of 10 years. Notably, since ZCL
first introduced its extended warranty policy just over 10 years ago, the
company has included it with roughly 2,000 Prezerver tanks, yet has not had a
single claim. This insurance protection is an extremely compelling selling
feature, given that similar policies are estimated to cost anywhere from $1,500
to $4,000 per year from private underwriters. From an environmental
perspective, this puts ZCL’s tanks head-and-shoulders above the quality of
incumbent steel USTs and largely constitutes why ZCL has earned its ‘industry
standard’ position in Canada. This claim was widely acknowledged by the
customers we contacted.
Emergence of Alternative Fuels and Fuel Blends

Ethanol is a fuel additive made from resources like corn and wheat that
facilitates a more complete combustion in vehicle engines. This renewable fuel
additive is receiving increasing attention due to its clean-burning characteristics,
resulting in reduced emissions and smog levels. Several provinces (including
Ontario, Alberta, Saskatchewan, and Manitoba) and the federal government
have either enacted, or stated their intention to introduce, legislation mandating
the use of these alternative fuels and fuel blends. Ontario Regulation 535/05,
Ethanol in Gasoline, which comes into effect on January 1, 2007, for example,
requires that gasoline in the province have an average ethanol content of 5%.
The federal government has also pledged its commitment to require 5% average
renewable content in Canadian gasoline and diesel fuel by 2010. The recently
unveiled (October 2006) Clean Air Act is a step towards fulfilling this target.
A few thousand Because many existing tanks are not suitable for the storage of ethanol
tanks could require enriched fuels, the emergence of these fuels is expected to spur new tank and/
either modification or tank retrofit (tank lining) demand. Specifically, both FRP tanks built prior to
or replacement 1979 and some epoxy and polyester lined steel tanks are not usable (due to the
breakdown of tank resins used at that time), while tanks built between 1979 to
1986 are considered unsuitable for richer ethanol/gasoline blends (15% or E85
for example)—compared to modern FRP tank design standards. Accordingly,
there are up to a few thousand tanks that could require either modification
(tank lining) or replacement depending on legislation.

In addition to the aforementioned drivers, we also point to the following factors
that will further support tank demand at the retail level:
• Increasing tank volumes—to offset declining gasoline margins retailers
have been attempting to secure operational profitability by increasing
volumes per site. This requires either the addition of new tanks or, more
commonly, upgrading older tanks to new large capacity tanks (tanks up to
100,000 litres are now being installed);
• Development and land-use changes—despite the decline in net station
counts, new sites are continually being added as rural land is developed and
traffic patterns are altered;
• Station layout changes and configurations—site optimization design
changes or marketing trends often lead to reconfiguring the location of, and
in turn, replacing underground tank farms; and
• Tank design changes—new industry tank design standards and best
practices have driven tank sales in the past.
USA
The U.S. market Although ZCL’s UST sales are restricted to the Canadian market until the end
represents a of 2008, we have included a brief overview of the U.S. market given that: (i)
significant ZCL’s tank lining business is not restricted from the U.S. marketplace; (ii)
opportunity for ZCL management has expressed its intention to enter the U.S. market, either after
starting in 2009 2008 or sooner via acquisition of Xerxes; and (iii) our financial forecasts and, in
turn, valuation of ZCL includes new tank revenue contribution (albeit
discounted) from the U.S.
Annual UST sales to the fuel retailing market is currently estimated at $200
million, with the two largest FRP tank manufacturers, Xerxes and Containment
Solutions Inc. (CSI), accounting for an estimated 50% of the market. Similar to
Canada, station rationalization has been occurring throughout the U.S. There
are currently an estimated 170,000 retail gas stations in the country, down from
210,000 in 1990. From an ownership perspective, mergers and acquisitions have
had a profound impact on the industry. The nation's five largest oil companies,
namely: Exxon-Mobil, BP Amoco-Arco, Chevron-Texaco, Phillips-Tosco, and
Marathon, are now estimated to control rough 60% of the domestic retail
gasoline market. Notably, the concentrated structure of the U.S. retail market
bodes well for ZCL's marketing style—namely to develop strong relationships
and establish national, multi-year, sales agreements directly with customers. It
is our understanding that the incumbent industry players (Xerxes and CSI) do
not rely as heavily on this sales model—rather they tend to use regional
distributors—and therefore we believe this represents a significant opportunity
for ZCL once the company enters the market.

The Energy Policy Beyond its larger size, the U.S. marketplace is influenced by essentially the
Act should result in same set of drivers as those in Canada. One important exception to this rule is
the end of single- the increased intensity in environmental regulation that is occurring south of the
walled UST sales border. Specifically, the Energy Policy Act of 2005 dictates that by February
2007, all states require either (i) secondary containment on all new or
replacement USTs within 1,000 feet of any existing community water system or
potable water well; or (ii) manufacturers and/or installers to be financially
responsible for any cleanup costs related to leaking tanks. Since the cited
water systems are so prevalent, this legislation essentially spells the end of new
single-walled UST sales. According to one source we contacted at the U.S.
Environmental Protection Agency (EPA), roughly 50% of the 690,000 active
USTs in the country are believed to be single-walled tanks. Even though a
number of these tanks will most-likely be taken out of service altogether, this
legislation should lead to an increase in double-walled UST sales as single-
walled tanks are phased out over roughly the next 10 to 15 years.
Finally, it should be noted that these are the minimum requirements that states
must adhere to. Individual states often legislate stricter requirements than what
is mandated at the federal level. Accordingly, we would not be surprised to see
some states require all existing tanks to have secondary containment in time. In
addition to driving new tank sales, such requirements could be very beneficial to
ZCL’s tank lining business, as discussed in the following section.
Pioneering the Next Generation of Tank Lining

ZCL has developed Lining the inner wall of tanks has been undertaken for years as a means of
an innovative lining providing corrosion protection, repairing leaks, ensuring product purity and
system for generally extending tank lives. ZCL, however, has taken the tank lining process
upgrading tanks to the next level by developing a unique lining system that allows for the
upgrade of single-wall tanks to a secondary contained system—essentially
providing the same protection as a new double-walled tank. This lining system,
which is being branded as the Phoenix Lining SystemTM in the U.S. and the
LIFELINER SystemTM elsewhere, utilizes ZCL’s patented Parabeam fibreglass
material and is capable of upgrading both steel and FRP tanks (see Exhibit 8).
EXHIBIT 8: ZCL’S TANK LINING
FIBREGLASS
TANK
STEEL TANK
Fibreglass Wall 3D Laminate
Source: Company Documents

The customer value The value proposition of ZCL's lining system is very compelling. Specifically,
proposition for tank because the lining system is applied in-situ (i.e., the tank is emptied and then a
lining is very trained technician enters the tank underground and applies the liner), costly
compelling . . . excavating, site disruptions, and service station downtime is kept to a minimum.
This results in vastly superior project economics relative to tank replacement—
in terms of both actual contractor costs and the lost revenue (both gasoline
sales and/or reduced convenience store business) associated with tank
replacement projects. Because tank replacement projects also often require
replacing sections of tank piping and electrical servicing (disconnecting and re-
connecting pump electrical service, etc.) these costs are also largely avoided.
Although overall costs will vary amongst sites, we spoke with one Phoenix
System customer who estimated that tank lining saves anywhere from 20% to
40% on a typical urban gas station compared to replacing tanks. At roughly
$250k for a two tank replacement job, this translates into customer savings
ranging from $50k to $100k. Given that the actual cost to line a tank is
considerably less than tank replacement—yet the customer's value perception
is relatively high—ZCL has a high degree of pricing power and stands to reap
very attractive margins, in our view.
. . . and the market Considering the newness of this application and the limited availability of
is very large market data, it is difficult to accurately size up the addressable market at this
time. What we do know is that it is potentially very large and three factors in
particular will predominately establish the ultimate size of the market, in our
view. These include:
1. Environmental legislation—some jurisdictions are toughening their
environmental regulations by requiring the phase-out of single-walled
tanks. The state of Florida, for example, has set a precedent in this area by
mandating all exiting single-walled tanks be upgraded to secondary-
containment by 2010. We understand several other states (including
Maryland, Pennsylvania, California, Alaska, Idaho, Oregon and
Washington) are considering similar requirements as well—but the timing
of such policies remains uncertain at this time. The 2005 U.S. Energy
Policy Act could, however, act as a catalyst for expediting secondary
containment legislation at the state level, in our view;
2. Liability reduction—there is a trend amongst owners (particularly the
majors) to voluntarily cull high-risk, single-walled tanks from their
networks. The major oil company representatives that we contacted, who
are responsible for station/tank upgrade programs, indicated that the
removal (or upgrade) of single-walled tanks is a priority; and
3. Special Situations/Niche Applications—in cases where USTs are either
difficult or costly to access (located under or directly adjacent to buildings
or roads for example) or located in high water table settings (where
excavating requires costly dewatering and/or pit shoring), tank lining is a
viable and cost-effective option for extending tank service.

ZCL management estimates that the potential annual market for its tank lining
products is in excess of $300 million in North America alone. While we do not
necessarily dispute this potential market size—in fact it could prove to be larger
with shifts in environmental regulations—for the purpose of forecasting tank
lining revenue, we feel it is prudent to take a more pragmatic, ‘bottom’s up’
approach to determining how much tank lining business ZCL can reasonably
generate. We say this because: (i) secondary tank lining is still in its nascent
stage; (ii) the selling cycle is long and complex; (iii) both pricing and costs will
exhibit variability based on site circumstances; and (iv) growth will be
dependent on how quickly ZCL can secure and train tank lining contractors and
locate candidate tanks in geographic clusters3 . These considerations are
reflected in our financial forecasts.
Tank lining could We note that tank lining could arguably lead to some cannibalization of new tank
lead to some sales given the commonality of some drivers. In cases where direct
cannibalization of cannibalization does occur, however, tank lining will deliver much more
new tank sales attractive margins.
In April of this year, ZCL signed a five year agreement with Tank Tech, Inc. for
the exclusive sale and installation of the Phoenix System within the State of
Florida. Under the terms of this agreement, Tank Tech is responsible for
marketing the application, securing contracts and managing the tank retrofits;
whereas ZCL simply supplies the high-margin Parabeam product. ZCL also
announced two test tank lining contracts in October. The first contract, with
Chevron Hong Kong Ltd., is for the lining of several single-walled tanks in
Hong Kong—where tank lining is reportedly a very attractive alternative given
that excavating tanks in Hong Kong is often challenging and/or cost prohibitive.
The second contract, with Shell Canada, is for the lining of several tanks in
Ontario. These tanks will be subsequently used for the storage of ethanol
blended fuel.
ZCL’s future tank Going forward, ZCL's tank lining strategy is to leverage its existing relationships
lining strategy to secure regional and national level tank lining contracts. Under this business
should capture model, ZCL will manage contracts with customers directly, while subcontracting
more value tank lining services to a select group of pre-qualified contractors. We favour
this model over the agreement with Tank Tech, as it allows ZCL to capture a
larger share of a project's value, as opposed to just acting as a supplier.
Petroleum Upstream (Oil and Gas Production)

ZCL manufactures steel, FRP and fibreglass-lined steel ASTs and USTs for the
upstream petroleum market. These products are primarily used for the storage
of drilling fluids, produced waters, and other liquids/waste associated with the
exploration, development, and production of crude oil and natural gas.
Customers of ZCL in the upstream market include: EnCana, Suncor Energy,
Talisman Energy and Husky.
3 As tank lining contractors typically only operate on a local or regional level as opposed to a national level, ZCL’s
tank lining strategy will gain the most traction in areas where candidate tanks are densely clustered together.

The upstream market is relatively fragmented with no single player having a
significant share. Although no tank registry exists, industry experts estimate
there are up to 50,000 tanks in service in the Western Canadian Sedimentary
Basin (WCSB) alone. With $6.5 million in revenue in fiscal 2006, ZCL
management estimates that they have about 5% of the market.
The upstream The quantity of producing wells and evolving environmental regulations are two
market is driven by of the more influential drivers in the upstream market. With respect to the
both the quantity of former, we note that the number of producing wells in western Canada has
producing wells increased substantially over the last five years (see Exhibit 9); thereby spurring
and evolving demand for the on-site storage of produced water. Compounding storage
environmental requirements is the fact the WCSB is a maturing basin, which results in a
regulations corresponding increase in the 'water cut' or amount of water each well
produces as a percentage of total fluid production (see Exhibit 10). As a result
of these two factors, the total volume of produced water in the WCSB has
grown at a CAGR of 5% over the last ten years, increasing by an average
volume of 40 million m3 per year.
EXHIBIT 9: NUMBER OF PRODUCING WELLS AND PRODUCED WATER ON THE RISE (1980-2005)
200,000 1,000,000
180,000 900,000
Producing Wells
160,000 Water Production 800,000
140,000 700,000
Water Production (000's m3)

Producing Wells
120,000 600,000
100,000 500,000
80,000 400,000
60,000 300,000
40,000 200,000
20,000 100,000
0 0
19 0
19 1
82
19 3
19 4
19 5
86
19 7
19 8
89
19 0
19 1
92
19 3
94
19 5
19 6
97
19 8
20 9
00
20 1
02
20 3
04
05
8
8
8
8
8
8
8
9
9
9
9
9
9
0
19
19
19
19
19
19
19
20
20
20
Source: GeoScout

EXHIBIT 10: WATER CUT (1980-2005)
200,000 100%
180,000 95%
Producing Wells
160,000 Water Cut 90%
140,000 85%
Production/Well (m3)
Producing Wells 120,000 80%
100,000 75%
80,000 70%
60,000 65%
40,000 60%
20,000 55%
0 50%
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
04
05
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
19
20
20
20
20
20
20
Source: GeoScout
Robust drilling activity is also beneficial to tank sales. The drilling process itself
results in associated fluid storage requirements and, when successful,
exploration drilling ultimately adds to the inventory of producing wells. While
year-over-year drilling activity has trended down in recent months (see Exhibit
11), we expect it to recover over the winter months as Raymond James’ Energy
Team is forecasting both higher oil and gas prices (2007 price forecasts are
US$70.00/barrel and US$10.00/mmbtu, respectively).
EXHIBIT 11: WEEKLY ACTIVE RIG COUNT (2004-2006)
Source: Rig Locator

Stricter environmental regulations are also playing a significant role in the
growing demand for tanks in the upstream market. Specifically, the Alberta
Energy and Utilities Board’s 2001 Directive 55: Storage Requirements for the
Upstream Petroleum Industry (formerly known as Guide 55), dramatically
clamped down on the environmental requirements for both ASTs and USTs.
For example, all USTs are now required to be double-walled, while all ASTs
with a volume of 5 m3 or greater are required to have secondary containment
(using a dike and lining system) or be double-walled. Monitoring and inspection
obligations were also beefed up under the new guidelines.
Alberta’s oil sands Finally, ZCL’s 2005 acquisition of Triple M Fiberglass—a manufacturer of
represent a growth custom tanks, vessels, and piping, etc.—further broadened the company’s
market for ASTs upstream product offering. Most notably, Triple M provides ZCL with exposure
to northern Alberta’s booming oil sands—where Alberta Economic
Development has identified ASTs as a key business opportunity related to the
expansion of in situ oil sands development. Given the water intensive nature of
steam assisted gravity drainage (SAGD) technology in particular, there is a
growing demand for large scale storage tanks as this technology is increasingly
deployed. Furthermore, Triple M manufactures specialized fibreglass piping
that is used for both steam injection and bitumen collection in SAGD
operations. According to management, a typical SAGD project can require
upwards of 20 kilometres of fiberglass piping.
Additional Markets/Future Growth Markets

Given the wealth of opportunities associated with the aforementioned markets,
ZCL is—and rightfully so in our view—focusing its efforts in these specific
areas. There are, however, several very attractive potential opportunities that
are on ZCL's radar screen, but are not being actively pursued at this time. We
briefly highlight three of these markets in particular.
Water and Wastewater
The water market is The U.S. market for septic, potable and non potable water, fire protection,
one of three key rainwater collection and irrigation vessels is estimated at $300 million annually.
future markets Fibreglass tanks are commonly used in these applications and both of ZCL’s
principal competitors south of the border, namely Xerxes and CSI, are
becoming increasingly active in these products. We understand that ZCL
management is currently reviewing strategies for future involvement in the
U.S. water/wastewater market.
Home Heating Oil Tanks
The annual home heating oil tank market in North America is estimated to be in
the hundreds of millions of dollars. Although ZCL has made initial inroads into
this market, including a coordinated marketing campaign last year with
partner's ING Insurance and Sears Canada, results came in well shy of
expectations ($1.5 million in revenue and a pre-tax loss of $1.0 million).
Because ZCL's double-wall FRP tanks will not corrode, they offer superior

protection against fuel leakage and costly soil contamination. They are,
however, currently priced at about a 20% premium relative to incumbent steel
tanks and, therefore, ZCL has struggled to gain traction. Nevertheless, should
the company be successful in further closing the cost gap relative to steel
tanks4 and if environmental regulations continue to tighten, ZCL's tanks will be
much more attractive to homeowners and the company should be capable of
capturing a much larger share of this elusive market.
Pulp and Paper Infrastructure Deficit
The pulp and paper Fibreglass storage tanks and piping systems are used extensively throughout the
market could pulp and paper industry. North American pulp and paper infrastructure
someday exceed (including tanks and piping) is reportedly aging rapidly and will ultimately require
$100 million in substantial capital investment. While we do not expect spending to ramp in the
annual revenue
near future, given the industry’s dismal financial condition, when spending does
pickup, we believe ZCL will be well-positioned to capitalize on this opportunity.
Management estimates the company could ultimately grow its sales in excess of
$100 million annually—compared to the $5.5 million in industrial/commercial
sales (which includes pulp and paper) that ZCL did in F2006.
Key Company Attributes

ZCL enjoys the preeminent position in the Canadian storage tank market. The
company’s flagship products—which are sold throughout the petroleum sector
value chain—provide ZCL with a solid footing to launch higher-growth
initiatives, both within and beyond the company’s home country borders. We
highlight the following key attributes that seem destined to keep ZCL at the
forefront of the industry.
Many customers Stable Customer Base—ZCL has entrenched relationships with numerous
consider ZCL’s blue chip customers in the petroleum sector. Many of ZCL customers,
tanks to be the particularly those in the downstream sector, consider ZCL’s tanks to be the
industry standard industry standard. This is reflected in ZCL’s extensive list of long-term sales
agreements with both majors and independents. These agreements provide
strong sales visibility for at least the next 3 to 5 years and act as a platform for
launching initiatives into higher growth markets. Finally, because many of ZCL’s
customers operate both in the U.S. and internationally, the company is in an
excellent position to leverage its relationships for the purpose of expanding sales
outside of Canada. In the near term, this includes potential tank lining and AST
sales, while retail UST sales outside of Canada become unrestricted in January
2009.
Leading Edge Technology—ZCL has deep technical expertise in composites
and has fostered a culture of innovation. Combined, this enables ZCL to
produce products that are stronger, lighter, and higher in quality than its
competitors. Upper management’s commitment to R&D, coupled with a best-in-
class engineering team, has resulted in numerous industry firsts for ZCL over
4 We note that steel tank manufacturers have reportedly been experiencing rising costs and declining margins.

the years (including first FRP double-wall tank and first FRP pressure vessel).
Protecting its technology leadership position is also top priority for the
company, as they have been very diligent in securing patents and maintaining
trade secrets. ZCL’s Parabeam product, for example, is covered by a portfolio
of over 20 patents (ranging from 5 to 20 years in remaining life). ZCL’s
unwavering commitment to technology will, in our view, ensure a pipeline of
innovative products, in both existing and emerging markets, for years to come.
Parabeam is ZCL’s Cost Leadership and Low Capital Intensity—ZCL's product designs,
secret sauce manufacturing scale and operational excellence all contribute to the company
achieving a competitive cost advantage relative to its peers. Management
estimates that ZCL has at least a 25% cost advantage over U.S. FRP tank
fabricators, due in part, to a sizable reduction in the amount of raw material
used in each ZCL tank. The company's Parabeam liner is largely responsible
for this advantage. Because Parabeam (which is 'sandwiched' between the two
walls of a double-walled tank) actually provides structural integrity once it is
saturated with resins and allowed to cure, less fibreglass material is required in
each of the tank walls. Additionally, ZCL's production facilities operate very
efficiently (scrap rates, for example, are reportedly less than 0.05%) with low
capital intensity. This latter point is reflected in ZCL's modest capital
expenditures (ZCL spent $921k and $432k, respectively, in capital additions in
the last two years). More importantly, ZCL's return on capital employed is
highly attractive. The company's current expansion of its Edmonton facility, for
example, is estimated to cost around $1.5 million. Yet it will expand capacity by
about 40%, adding roughly $7 million annually to the top line. Assuming an
after-tax profit margin of 9% (ZCL's TTM profit margin), this equates to a
return on investment of 42% or a payback of less than 30 months. Such modest
investment requirements will prove highly beneficial when ZCL ultimately
expands its new tank sales into the U.S.
We expect several First Mover Advantage in Tank Lining—ZCL’s tank lining technology
tank lining represents a paradigm shift in the industry. The world-wide market for the
contracts to be application is very large and the customer value proposition is exceptionally
announced in early compelling. The company’s robust platform of intellectual property and already
to mid 2007 secured regulatory certification gives ZCL a sizable jump on the competition.
This latter point alone provides ZCL with a captive market for at least 6
months (and up to 24 months) following the development of a competing
product, given the testing provisions that are required to obtain UL/ULC
approval. To capitalize on this opportunity, ZCL recently hired a new U.S.
Sales Manager, Mr. Richard Whately, who brings over 20 years experience in
the petroleum equipment industry. Mr. Whately’s mandate is to pursue the U.S.
market aggressively. As such, we expect ZCL to announce several tank lining
contracts with major oil companies in early to mid 2007, following the
completion of ongoing trial projects and the approval of customer budgets.

Financial Strength—ZCL has a solid balance sheet with no debt. The company
has, however, accessed long-term debt in the past and currently has $10.3
million in available operating lines of credit. ZCL’s financial health and access to
capital provide flexibility for opportunistic acquisitions. Specifically, we believe
the fragmented upstream petroleum tank market and the U.S. retail UST market
offer select acquisition opportunities. With respect to the latter, an acquisition of
Xerxes Corporation would nullify ZCL’s licensing agreement with Xerxes and
provide for immediate access to the retail UST market south of the border.
Competitive Landscape
While ZCL controls The degree of competition ZCL faces varies amongst its product lines. For
roughly 90% of the example, with ZCL controlling an estimated 90% of the retail UST sales in
retail UST market Canada, this key market remains essentially uncontested5 . Additionally, we have
in Canada . . . yet to identify a credible competitor in the lucrative tank lining business. The
closet comparable products to what ZCL offers is the X-Tank manufactured by
Xerxes and the ReTank by CSI. Notwithstanding that the end goal of these
competing products is essentially the same (i.e., to provide secondary
containment to a single-walled tank), the means of accomplishing this are
entirely different. Both Xerxes and CSI ship sections of FRP tank material and
supporting ribs to a site and then reassemble them within the tank (i.e., the
rebuilding of a cut up tank within an existing tank). Not only is this only suitable
for specific tank sizes due to the use of pre-manufactured tank sections—
whereas ZCL's technology is suitable for any tank size—it is also more
cumbersome, time consuming and in turn, expensive to install. Accordingly,
during our due diligence checks, we were unsurprised to hear from one of
Xerxes' sales representatives that their product has had very limited success in
the marketplace. Finally, as mentioned previously, the testing requirements
needed to obtain UL/ULC listing for secondary containment tank lining should
keep competitors at bay for at least an additional six months once a product is
successfully developed.
. . . the upstream Conversely, ZCL faces a more competitive environment in the fragmented
market remains petroleum upstream market. Established players such as GLM Tanks &
relatively Equipment (recently purchased by a U.S.-led private equity firm), Universal
fragmented Industries and Corlac Industries (both of which are part of the Foremost Income
Fund Group) as well as numerous mom and pop fabricators all supply ASTs to
the upstream market. In our view, the high quality of ZCL’s products, coupled
with its ability to drive down costs—by exploiting synergies with its UST
manufacturing (i.e., raw material buying power, use of Parabeam, etc.)—should
keep ZCL very competitive in the upstream market.
5 We understand CSI recently announced it will be entering the Canadian UST market in late 2006. Given: (i) ZCL’s
design cost advantage; and (ii) the shipping premiums that CSI will be required incur to reach most Canadian markets,
we do not believe their entry will have a material impact on ZCL’s position in the marketplace.

Business Risks
We highlight the following as the key business risks that pertain to ZCL.
Sector and Geographic Concentration—ZCL derived 96% of its F2006
revenue from Canada and the company is highly concentrated within the
petroleum sector (80% of F2006 revenue). Of ZCL’s total petroleum sector
exposure, we believe the company’s smaller upstream business (14% of total
revenue) is the most susceptible to changes in commodity prices—namely oil
and gas.
Failure/Quality Control of Tank Lining Product—ZCL’s tank lining
products are relatively new and do not have an extensive history of use under
real world conditions. More specifically, while management estimates that more
than 300 USTs have now been retrofitted, many of these tanks have not been
back in operation for an extensive period of time. Should the tank lining system
prove to be problematic (or should quality control over lining contractors be
compromised) and ZCL is unable to quickly resolve any such issues, the
company’s tank lining business faces potential revenue decline, perhaps
significant decline. There are, however, a number of factors that, in our view,
greatly reduce the likelihood of this scenario unfolding. These include: (i) ZCL
has been developing and testing its tank lining product in-house since 1999; (ii)
the core material in ZCL’s tank lining product, Parabeam, has been
successfully used in ZCL’s traditional double-wall tank products for years; and
(iii) the product recently received both UL and ULC listing—which requires,
among other things, rigorous third-party testing.
A 5% rise in resin Rising Input Costs—the vast majority of ZCL’s products are manufactured
prices reduces our from FRP, for which polyester resins are the primary raw material. A sharp
2007 EPS estimate rise in resin prices, which are linked to crude oil prices, may negatively impact
by 3 cents ZLC’s gross margins. Raw materials account for about 50% percent of ZCL’s
cost of goods sold and of this, resins represent about 75% percent. Therefore,
a 5% rise in resin prices—if not offset by corresponding price hikes—reduces
our 2007 EPS estimate by 3 cents. Notably, when resin costs escalated in
F2006 due to sky rocketing crude prices, ZCL’s gross margin compressed a full
330 bps year-over-year. However, given ZCL’s dominate market share, the
company was ultimately able to implement price increases while not
experiencing much, if any, noticeable signs of elasticity in demand.
Labour Shortages—our revenue growth forecasts for ZCL imply that the
company is capable of attracting, hiring and retaining additional human
resources. The company’s tank lining strategy is also dependent on securing
agreements with adequately-staffed, tank lining contractors. In certain
geographic regions where the firm operates manufacturing facilities, such as
Alberta, ZCL currently faces a very tight labour market. Any requirement to
ramp up resources in a labour starved environment could result in upward
pressure on costs. ZCL is, however, able to draw from a broader labour pool—
given that worker skill level requirements are typically at the general labour
level as opposed to a technician or other skilled trade (where labour shortages

are more pronounced). In fact according to management, ZCL is able to fully
train a new employee on its production line in as little as three weeks.
Exposure to f/x Currency Fluctuations—ZCL currently generates the vast majority of its
fluctuations will revenue (95% in F2006), and reports its financial results, in Canadian dollars.
become a bigger However, a significant portion of the company's future growth opportunities are
risk going forward in international markets—particularly the U.S. Accordingly, the company may
become exposed to foreign currency fluctuations, which may adversely affect
financial results.

FINANCIAL ANALYSIS AND OUTLOOK
In early 2006, ZCL announced it will be changing the date of its fiscal year end
from March 31 to December 31. Therefore, the company will restate its former
year end results following the completion of the current reporting period (i.e.,
the three quarters ending December 31).
On the heels of two very impressive quarters, we expect ZCL to finish the year
on a high note. For the period ending December 31, we anticipate ZCL posting
revenue of $42.8 million and fully diluted EPS of $0.20. Exhibit 12 presents
details of both our quarterly and year end expectations.
EXHIBIT 12: ZCL QUARTERLY INCOME STATEMENT SUMMARY
C$ thousands Oct - Dec Oct - Dec % Chg Apr - Dec Apr - Dec % Chg
2006E 2005 2006E 2005
Revenue 16,300 13,044 25.0 42,826 32,504 31.8

Manufacturing and selling costs 12,307 10,302 19.5 32,765 26,230 24.9
Gross Profit 3,994 2,742 45.6 10,062 6,274 60.4
Expenses:
Amortization 430 379 13.5 1,225 1,112 10.2
General and administration 725 655 10.7 2,167 1,607 34.8
Financing charges 15 56 (73.2) 18 219 (91.8)
1,170 1,090 7.3 3,410 2,938 16.1
Income before income taxes 2,824 1,652 70.9 6,652 3,336 99.4
Income taxes
Current 500 602 1,917 817
Future 460 (15) 303 390
960 587 63.5 2,220 1,207 83.9
Net income from continuing operations 1,864 1,065 75.0 4,432 2,129 108.1
Net income from discontinued operations - -
Net income 1,864 1,065 75.0 4,432 2,129 108.1
Earnings per share

Basic - reported 0.09 0.06 49.5 0.21 0.12 78.7
Diluted - reported 0.08 0.05 58.0 0.20 0.11 88.7
Diluted - from continuing operations 0.08 0.05 58.0 0.20 0.11 88.7
Weighted shares outstanding (avg. in mln)

Basic 21.1 18.0 17.0 20.9 18.0 16.1
Diluted 22.4 20.2 10.8 22.3 20.2 10.0
Ratios (%):
Gross margin 24.5 21.0 23.5 19.3
General and administrative/revenue 4.4 5.0 5.1 4.9
Amortization/revenue 2.6 2.9 2.9 3.4
Interest expense/revenue 0.1 0.4 0.0 0.7
Pretax margin 17.3 12.7 15.5 10.3
Income tax rate 34.0 35.5 33.4 36.2
Net profit margin 11.4 8.2 10.3 6.5
EBIT - normalized 2,839 1,708 66.2 6,670 3,555 87.6

EBIT margin (%) 17.4 13.1 15.6 10.9
Depreciation and amortization 430 379 13.5 1,225 1,112 10.2
Operating cash flow (EBITDA) - normalized 3,269 2,087 56.6 7,895 4,667 69.2
EBITDA margin (%) 20.1 16.0 18.4 14.4
Source: Company Documents, RJ Research estimates and analysis

Revenue and With the company's tank lining products now certified, the next few years
earnings are represent a pivotal shift for ZCL, in terms of both revenue generation and more
poised for growth importantly, earnings lift. Our favourable outlook is reflected in our respective
EPS and EBITDA forecasts of $0.40 and $15.6 million for 2007 and $0.47 and
$18.5 million for 2008. The following provides more details of our 'official'
expectations for the next two years, while complete financial forecasts are
presented as (Exhibits 13 and 14):
i. Revenue Targets. We expect ZCL to grow the top line by 24% in F20076
(to $70.0 million) and 15% in 2008 (to $80.2 million). Exhibit 15 presents
our estimates on a segmented basis. Of note, we expect ZCL to post Rest
of World (ROW)7 tank lining revenue of $8.0 million and $12.0 million,
respectively in 2007 and 2008. Assuming the average tank is lined for
$50,000, this implies that ZCL is capable of securing contracts for a total of
160 tanks and 240 tanks in 2007 and 2008, respectively. Additionally, we
expect the Florida Tank Tech contract to contribute revenue of $2.4 million
in 2007 and 3.6 million in 2008. Finally, all of our forecasted revenue
growth is organic, as we have not modeled ZCL undertaking any material
acquisitions over the next 2 years.
Tank lining is ii. Margins. We expect ZCL's margins to continue to expand for two
expected to further reasons. First, ZCL should continue to benefit from a full year of the price
expand margins hikes (to cover rising raw material costs) that were implemented last year,
albeit at a decelerating rate. Overshadowing this will be the company's
shift in product mix towards high-margin tank lining which we expect to
have a more dramatic influence on margins. Specifically, we are
forecasting ZCL's consolidated gross margin to expand 390 bps to 27.1% in
2007. For 2008, we are forecasting a gross margin of 28.0%. From an
EBIT standpoint we are modeling margins of 19.6% in 2007 and 20.3% in
2008, up from our 2006 estimate of 15.3%. This favourable EBIT margin
expansion reflects the highly scalable nature of tank lining—resulting in
lower fixed costs as a percent of sales.
ZCL’s capex iii. Cash Flow. After accounting for a rise in non-cash working capital
requirements are (mainly accounts receivable as tank lining does not require heavy
relatively low, investments in inventory), we are forecasting cash flow form operations of
resulting in healthy $6.0 million in 2007. Maintenance capex is expected to be modest at $1.0
free cash flow million, which translates into ZCL generating $5.0 million of free cash flow
For 2008, we are expecting cash flow from operations to be $9.1 million. In
preparation to entering the retail UST market in the U.S. in 20098, we are
modeling that ZCL constructs one U.S. manufacturing facility in 2008. Our
capex estimate for this is $6.0 million, resulting in free cash flow of $3.1
million in 2008 . With strong internal cash flow generation and manageable
capital requirements, we do not anticipate ZCL requiring any external
financing in either 2007 or 2008.
6 All references to growth over 2006 are based on pro forma estimates for calendar year 2006 (as opposed to ZCL's
former year end of March 31). A pro forma calendar year Income Statement is included as Appendix A.
7 All tank lining revenue excluding the Tank Tech agreement for the State of Florida.
8 Although some northern U.S. markets can be served from ZCL's Canadian facilities, to remain cost competitive, we
assume ZCL will require some U.S. manufacturing presence (to avoid onerous shipping fees)

EXHIBIT 13: ZCL INCOME STATEMENT (F2004-F2008E)
% Chg % Chg % Chg % Chg % Chg
C$ thousands Mar. 31 Fiscal Year End Dec. 31 Fiscal Year End
Apr - Dec 04/03 05/04 06/05 07/06 08/07
F2004 F2005 F2006 2006E F2007E F2008E
Revenue 33,932 38,756 46,166 42,826 70,009 80,236 28.9 14.2 19.1 n.m. 14.6
Manufacturing and selling costs 25,966 29,669 36,876 32,765 51,055 57,740 22.6 14.3 24.3 n.m. 13.1
Gross Profit 7,966 9,087 9,290 10,062 18,954 22,496 54.7 14.1 2.2 n.m. 18.7
Expenses:
Amortization 1,968 1,758 1,497 1,225 1,800 2,200 1.0 (10.7) (14.8) n.m. 22.2
General and administration 1,873 2,029 2,255 2,167 3,400 4,000 21.3 8.3 11.1 n.m. 17.6
Provision for impairment of agreement receivable 880 - - - - -
Financing charges 370 73 266 18 (125) (160) (0.5) (80.3) 264.4 n.m. 28.0
5,091 3,860 4,018 3,410 5,075 6,040 31.8 (24.2) 4.1 n.m. 19.0
Income before income taxes 2,875 5,227 5,272 6,652 13,879 16,456 123.9 81.8 0.9 n.m. 18.6
Income taxes
Current (42) 1,192 1,504 1,917 3,000 4,000
Future 965 555 344 303 1,858 1,760
923 1,747 1,848 2,220 4,858 5,760 74.8 89.3 5.8 n.m. 18.6
Net income from continuing operations 1,952 3,480 3,424 4,432 9,021 10,696 158.2 78.3 (1.6) n.m. 18.6
Net income from discontinued operations - - 319 - - -
Net income 1,952 3,480 3,743 4,432 9,021 10,696 561.7 78.3 7.6 n.m. 18.6
Earnings per share

Basic - reported 0.11 0.20 0.20 0.21 0.43 0.50 421.8 77.8 3.5 n.m. 17.5
Diluted - reported 0.11 0.18 0.18 0.20 0.40 0.47 420.3 63.5 8.4 n.m. 17.5
Diluted - from continuing operations 0.14 0.18 0.17 0.20 0.40 0.47 165.2 25.2 18.5 n.m. 17.5

Basic 17.6 17.7 18.3 20.9 21.1 21.3
Diluted 17.7 19.3 20.4 22.3 22.5 22.7
Shares outstanding (year end) 17.5 17.9 20.1 22.3 22.5 22.7
Ratios (%):
Gross margin 23.5 23.4 20.1 23.5 27.1 28.0
General and administrative/revenue 5.5 5.2 4.9 5.1 4.9 5.0
Amortization/revenue 5.8 4.5 3.2 2.9 2.6 2.7
Interest expense/revenue 1.1 0.2 0.6 0.0 (0.2) (0.2)
Pretax margin 8.5 13.5 11.4 15.5 19.8 20.5
Income tax rate 32.1 33.4 35.1 33.4 35.0 35.0
Net profit margin 5.8 9.0 7.4 10.3 12.9 13.3
EBIT - normalized 4,125 5,300 5,538 6,670 13,754 16,296 149.1 28.5 4.5 n.m. 18.5
EBIT margin (%) 12.2 13.7 12.0 15.6 19.6 20.3
Depreciation and amortization 1,968 1,758 1,497 1,225 1,800 2,200 1.0 (10.7) (14.8) n.m. 22.2
Raymond James Equity Research - Canada

Operating cash flow (EBITDA) - normalized 6,093 7,058 7,035 7,895 15,554 18,496 69.1 15.8 (0.3) n.m. 18.9
EBITDA margin (%) 18.0 18.2 15.2 18.4 22.2 23.1
27
EXHIBIT 14: ZCL CASH FLOW STATEMENT (F2004-F2008E)
Mar. 31 Fiscal Year End Dec. 31 Fiscal Year End

C$ thousands Apr - Dec
F2004* F2005 2006 2006E 2007E 2008E
Cash flows from operating activities

Net income n.a. 3,480 3,743 4,432 9,021 10,696
Add items not affecting cash:
Amortization expense n.a. 1,758 1,497 1,225 1,800 2,200
Future tax expense n.a. 555 344 - - -
Stock based compensation n.a. 107 195 - - -
n.a. 5,900 5,779 5,657 10,821 12,896
Changes in non-cash working capital
Increase in accounts receivable n.a. (4,931) (212) (543) (4,295) (4,585)
Increase in inventories n.a. (1,436) (1,193) (1,125) (2,112) (1,537)
Decrease (increase) in prepaid expenses n.a. (360) 246 (35) (331) 197
Decrease (increase) in accounts payable & accrued liabilities n.a. 1,812 (1,494) 819 1,882 2,144
Decrease (increase) in income tax payable n.a. 1,301 (565) - - -
Cash flow from operating activitites 6,101 2,286 2,561 4,772 5,966 9,115
Cash flows from financing activitites

Issue of common shares and warrants - 411 2,102 1,200 - -
Dividends - (1,051) (1,438) (2,088) (2,108) (2,128)
Net advances of bank indebtedness - - 114 (114) - -
Repayment of long-term debt (4,643) - - - - -
Repurchase of common shares for cancellation (189) - - - - -
Issue of long-term debt - - - - - -
Common share issue costs - - - - - -
Finance costs - - - - - -
Repayment of convertible subordinated debenture - - - - - -
Convertible subordinated debenture costs - - - - - -
Cash flows from (used in) financing activities (4,832) (640) 778 (1,002) (2,108) (2,128)
Cash flow from investing activitites

Business acquisition, including bank indebtedness assumed - (1,193) (2,597) - - -
Purchase of property, plant and equipment (581) (432) (921) (1,000) (1,000) (6,000)
Purchase of intangible assets - - (369) - - -
Collection of agreement receivable - - - - - -
Deferred development costs (141) (518) (835) (400) - -
Cash flows from (used in) investing activiities (722) (2,143) (4,722) (1,400) (1,000) (6,000)
Decrease in cash
Cash, beginning of year 1,333 1,880 1,383 - 2,370 5,228
Cash, end of year 1,880 1,383 - 2,370 5,228 6,214
Cash Flow Analysis:

Cash from operating activities (cf) 6,101 2,286 2,561 4,772 5,966 9,115
Operating cash flow (EBITDA) - normalized 6,093 7,058 7,035 7,895 15,554 18,496
Capital expenditures (net) (581) (432) (1,290) (1,000) (1,000) (6,000)
Free cash flow (cf-net capex) 5,520 1,854 1,271 3,772 4,966 3,115
Business acquisitions (net) - (1,193) (2,597) - - -
Free cash flow after capex & business acquisitions 5,520 661 (1,326) 3,772 4,966 3,115
Free operating cash flow (EBITDA-capex) 5,512 6,626 5,745 6,895 14,554 12,496
Financial Position (year end):

Total debt - - 114 - - -
Cash 1,880 1,383 - 2,370 5,228 6,214
Total net debt (1,880) (1,383) 114 (2,370) (5,228) (6,214)
Equity 20,882 23,829 28,431 31,974 38,887 47,455
Total net debt-to-equity ratio (x) (0.09) (0.06) 0.00 (0.07) (0.13) (0.13)
Total net debt-to-EBITDA ratio (x) (0.31) (0.20) 0.02 (0.30) (0.34) (0.34)
Note:
* Data not available - prior to fiscal 2005 Direct Method was used for generating cash flow statement

EXHIBIT 15: ZCL SEGMENTED REVENUE (F2006E-F2008E)
% Chg % Chg % Chg

C$ thousands 06/05 07/06 08/07
F2006E(1) F2007E F2008E
Segmented Revenue
Retail Petroleum - Canada 33,045 34,698 36,433 n.m. 5.0 5.0

Retail Petroleum - USA - - - n.m. n.m. n.m.
Upstream Petroleum 9,321 10,719 12,326 n.m. 15.0 15.0
Industrial/Commercial 8,473 9,744 11,206 n.m. 15.0 15.0
Home Heating Oil 1,977 2,076 2,180 n.m. 5.0 5.0
Parabeam 2,260 2,372 2,491 n.m. 5.0 5.0
Tank Lining - Florida 1,412 2,400 3,600 n.m. 69.9 50.0
Tank Lining - Rest of World - 8,000 12,000 n.m. n.m. 50.0
Revenue 56,488 70,009 80,236 n.m. 23.9 14.6
Notes:
(1) Pro forma estimates based on a December 31 year end.
Scenario Analysis
Our financial With tank lining still in the early stages of a commercial rollout, and with
analysis also demand dependent on factors such as future environmental regulations, we
considers three believe forecasting revenue generation with a high degree of precision is
different scenarios inherently challenging at this time. Moreover, looking a few years out, our
overall revenue projections are also dependent on whether or not ZCL enters
the U.S. retail UST market prior to 2009, via acquisition of Xerxes.
Accordingly, we believe examining select outcomes by adjusting these two key
parameters in particular provides investors with a range of probable outcomes
to consider. To accomplish this, we extend our timeline out to 2010 and then
construct what we believe represents the three most likely scenarios for ZCL,
namely a conservative, base case, and optimistic scenario.
With the exception of new tank lining revenue and retail UST sales in the US,
all other lines of business are modeled exactly the same in our three different
scenarios. Our aforementioned ‘official’ forecast is the most probable scenario,
in our view, and is therefore assigned as our base case. This scenario assumes
ZCL meets its guidance for securing roughly $8 million in ROW tank lining
business in 2007 and is able to grow this business at an annual growth rate of
50%; a target management believes is achievable. Conversely, our
conservative scenario, assumes customers are either slower to employ the
technology or are more selective about its use (i.e., the market ends up utilizing
secondary tank lining mainly for niche applications, where tanks are either
under or adjacent to buildings or in high water table settings for example). This
scenario is not explicitly contingent on any changes in environmental
regulations to drive demand. We believe initial revenue of $5 million in 2007
with an annual growth rate of 40% is reasonable for this scenario. Both our

conservative and base case scenarios assume ZCL does not begin selling USTs
into the U.S. retail market until 2009. Finally, our optimistic case assumes that
ZCL’s tank lining is very well received in the marketplace, driven in part by at
least one state in the U.S. enacting mandatory secondary containment similar to
the state of Florida during the forecasting period. Under this scenario, we
forecast ROW tank lining revenue of $12 million in 2007 with a 60% annual
growth rate. Our optimistic case also differs from the first two scenarios in that
it assumes ZCL is successful in acquiring Xerxes Corporation in late 2007.
Exhibit 16 details our scenario assumptions, Exhibit 17 summarizes our financial
forecasts for each scenario, and Exhibit 18 presents the assumptions used for
the acquisition of Xerxes, under our optimistic case.
EXHIBIT 16: ZCL SCENARIO ASSUMPTIONS (F2007E-F2010E)

SCENARIO ASSUMPTIONS F2007E F2008E F2009E F2010E
(1)
A) TANK LINING - ROW
Tank Lining Revenue (C$ 000s)
Conservative 5,000 7,000 9,800 13,720
Base Case 8,000 12,000 18,000 27,000
Optimistic 12,000 19,200 30,720 49,152
Annual Tank Lining Growth Rate (%)

Conservative n.a. 40 40 40
Base Case n.a. 50 50 50
Optimistic n.a. 60 60 60
Implied Number of Tanks Lined

Conservative 100 140 196 274
Base Case 160 240 360 540
Optimistic 240 384 614 983
(2)
B) US RETAIL UST MARKET
UST Revenue (C$ 000s)
Conservative n.a. n.a. 6,000 9,000
Base Case n.a. n.a. 10,000 18,000
Optimistic n.a. 46,305 50,936 58,576
Annual UST Growth Rate (%)

Conservative n.a. n.a. n.a. 50
Base Case n.a. n.a. n.a. 80
Optimistic n.a. n.a. 10 15
Notes:
1) Assumes each tank is lined for C$50k in revenue
2) Optimistic case assumes ZCL is successful in acquiring Xerxes in 2007

EXHIBIT 17: ZCL SCENARIO FINANCIAL FORECASTS (F2007E-F2010E)
FINANCIAL FORECASTS F2007E F2008E F2009E F2010E
Total Revenue (C$ 000s)

Conservative 67,009 75,236 91,421 106,358
Base Case 70,009 80,236 103,621 128,638
Optimistic 74,009 133,741 157,276 191,366
EBITDA (C$ 000s)

Conservative 14,414 16,696 20,926 24,703
Base Case 15,554 18,496 24,614 30,977
Optimistic 17,074 29,886 36,438 45,309
EBITDA Margin (%)

Conservative 21.5 22.2 22.9 23.2
Base Case 22.2 23.1 23.8 24.1
Optimistic 23.1 22.3 23.2 23.7
EXHIBIT 18: ZCL OPTIMISTIC CASE - XERXES ACQUISITION ASSUMPTIONS
Xerxes estimated 2006 revenue (C$ 000s) 42,000

Estimated EBITDA margin 10%
Estimated EBITDA (C$ 000s) 4,200
Target EBITDA multiple(1) 8.0

Enterprise value (C$ 000s) 33,600
Percent financed by debt 100%

Transaction close mid 2007
Notes:
(1) Transaction multiples in the traditional upstream steel tank market reportedly range from 4 - 6 times
trailing EBITDA. We believe Xerxes should command a premium to this due to its market leadership
position and focus on composites.

STOCK VALUATION AND RECOMMENDATION
We derive our 6-12 Based on the range of outcomes our scenario analysis yielded, we have elected
month target price to derive our target price by means of a blended valuation. To accomplish this,
by means of a we: (i) apply a target multiple to our respective 2010 EBITDA estimates; (ii)
blended valuation discount these values back three years; (iii) assign probability weightings to
each scenario; and (iv) sum these values to produce a 6-12 month target price.
Because ZCL’s peers are either private companies (Xerxes and CSI) or
divisions of larger diversified business, we do not have the luxury of basing a
target EV/EBITDA multiple relative to a group of pure play comparables. We
do believe, however, that a premium multiple relative to the industrial sector in
general is warranted given ZCL’s: (i) superior growth profile in tank lining, rest
of world UST sales and emerging markets (water/wastewater, home heating oil
tanks, etc.) beyond 2010; (ii) design and manufacturing cost advantage; (iii)
technology leadership position; and (iv) robust free cash flow generation and
high return on capital. As such, we apply a 12.0 times multiple to our range of
2010 EBITDA estimates. Likewise to account for the innate risks associated
with emerging products and lack of stock liquidity, we discount these values
back at a rate of 15%.
Given that our highest degree of confidence rests on our base case, we assign
With a probability this scenario a 50% probability weighting. Our conservative case is the next
weighting of 50%, most probable outcome, in our view, as it reflects the often slower-than-
we consider our expected decision making process of both major oil companies and regulators.
base case scenario We assign a probability of 30% to this case. We feel a weighting any higher
to be the most
than this would run the risk of underestimating the potential of secondary tank
likely
lining (i.e., the abundance of standalone niche opportunities). Although our
optimistic case is certainly achievable, it is dependent on the near flawless
execution of several factors. Firstly, this includes the successful acquisition of
Xerxes—a privately held company—in 2007. As noted previously, ZCL and
Xerxes have clashed in courts in the past and therefore it remains uncertain if
the company is a willing seller (and if so, are they at a reasonable price?).
Secondly, should ZCL be successful in acquiring Xerxes sometime in 2007, they
will need to quickly and seamlessly transition Xerxes’ manufacturing process to
accommodate ZCL’s tank designs (to achieve the desired cost savings we have
modeled in 2008). Management estimates this can be done in roughly three
months and therefore we have only allocated this much time for transitioning.
Finally, the tank lining projections under our optimistic scenario leave little room
for rollout delays and our growth expectations are ambitious. As noted in our
investment perspective, despite the potentially gargantuan size of the market,
tank lining has inherent growth limitations. We remind investors that these
include: (i) a partial dependency on future environmental regulations; (ii)
securing and negotiating regional and national contracts; (iii) securing and
training tank lining contractors and locating candidate tanks in geographic
clusters; and (iv) in many jurisdictions, navigating the bureaucracy of state and/
or municipal permitting offices. For these reasons, it is unsurprising to us that

despite Florida having the most favourable secondary containment tank lining
regulations, only about 100-150 tanks have been lined using ZCL's products in
this state over the last 12 months. Based on all of this, we assign our lowest
probability (20%) to our optimistic scenario.
Our scenario As illustrated in Exhibit 19, our conservative, base case, and optimistic
analysis produced scenarios each yield a respective 6-12 month target price of $8.99, $11.14, and
target prices $15.31. This approach highlights the range of target prices that we believe to
ranging from $8.99 be reasonable based on the scenarios previously outlined and also provides
to $15.31 investors with a framework for evaluating what they believe ZCL's stock
should be worth based on which scenario they perceive to be the most realistic.
EXHIBIT 19: ZCL PROBABILITY WEIGHTED VALUATION

Conservative Base Case Optimistic
2010 EBITDA (C$ mlns): 24.7 31.0 45.3
Target Multiple: 12.0x 12.0x 12.0x
Enterprise Value: 296.4 371.7 543.7
Net debt (C$ mln) (19) (20) 6
Shares O/S (mln): 23.1 23.1 23.1
Target Price (C$): $13.67 $16.94 $23.28
Discount Rate (%): 15.0% 15.0% 15.0%
Discounted Target ($): $8.99 $11.14 $15.31
Probability: 30.0% 50.0% 20.0%
Weighted Price (C$): $2.70 $5.57 $3.06
Blended Target Price (C$): $11.33
Our analysis For the purpose of our analysis, we have elected to assign probability
suggests that ZCL’s weightings to each of these scenarios, as outlined above. This results in our 6-
stock is fairly 12 month target price of $11.30 for ZCL's common shares. On a P/E basis, our
valued at this time target price implies 28.3 times and 24.0 times our respective EPS estimates for
2007 and 2008. With only 6% of potential upside based on the stock's recent
closing price of 10.70, our analysis suggests that ZCL's stock is fairly valued at
this time.
Beyond a material acquisition announcement (such as Xerxes) or larger and
sooner-than-expected tank lining contracts, we do not see any significant
catalysts to take ZCL's stock higher at this time. A possible exception to this
would be a takeover offer for ZCL itself—as we believe the company has
many characteristics that would be attractive to a strategic buyer. Possible
acquirers could include the likes of: (i) Ameron International Corporation, an
engineered products company with composites expertise; (ii) Future Pipe
Group, a leader in FRP piping with a relatively small FRP tank division; (iii) or
private equity investors. As ZCL gains momentum in the coming years, we
postulate that a takeout offer equal to at least our optimistic scenario value
($15.31 per share) is realistic from a potential acquirer who can add scale and
an international presence to ZCL's tank lining business. While such an offer
equates to 18.5 times our 2008 EBITDA estimate (base case), we argue that

this is not unrealistic given ZCL's superior attributes (as expounded throughout
this report) and the takeout multiples observed in related sectors (water, plastic/
chemical, and industrial equipment/machinery – see Exhibit 20).
Less risk-adverse investors who place a higher probability on the aforementioned
catalysts occurring sooner rather than later could rationally justify buying ZCL
shares at their current level. However, in the interest of being conservative and
balanced, we prefer to wait for either some reduction in the execution risk
associated with tank lining or for some share price weakness before aggressively
backing the purchase of this stock. In the meantime, we rate the shares
MARKET PERFORM.
EXHIBIT 20: COMPARABLE TAKEOUT MULTIPLES

Transaction Trailing
Target Acquirer Date Value EV/EBITDA Source
(US$ mln) (x)
Water
Cuno Inc. 3M May-05 1,366 20.4 Capital IQ
Zenon Environmental Inc. GE Mar-06 706 n.m. Capital IQ
Trojan Technologies Inc Danaher Corp Sep-04 198 30.2 Capital IQ
Ionics Inc. GE Nov-04 1,303 26.9 Capital IQ
US Filter Siemens AG May-04 993 10.0 Techknowledgey Group
Krebs International, Inc. Groupe Laperriere & Verreault Dec-06 110 11.0 GL&V/RJ Research
National Waterworks Holdings, Inc Home Depot U.S.A, Inc. Jul-05 2,010 15.3 Capital IQ
WICOR Industries, LLC Pentair Inc. Feb-04 875 10.0 Techknowledgey Group
Group Average 17.7
Industrial Plastics, Coatings and Specialty Chemicals

Johnson Polymer BASF AG Jun-06 470 11.0 ICIS
Ameron Int. (PC&F Division) PPG Industries Aug-06 115 10.0 Ameron International
Sovereign Specialty Chemicals Inc. Henkel Corporation Oct-04 582 11.0 Capital IQ
ElkCorp Building Materials Corp of America Nov-06 849 7.5 Capital IQ
Royal Group Technologies Georgia Gulf Jun-06 1,533 15.2 Capital IQ
Group Average 10.9
Industrial Equipment/Machinery
BW Technologies First Technology PLC May-04 189 20.2 RJ Research
Total Average 15.3

APPENDIX A: CALENDAR YEAR INCOME STATEMENT (F2004-F2008E)
C$ thousands; Pro Forma Dec 31 Year End
% Chg % Chg % Chg % Chg
05/04 06/05 07/06 08/07
F2004E F2005E F2006E F2007E F2008E
Revenue 36,285 42,876 56,488 70,009 80,236 18.2 31.7 23.9 14.6
Manufacturing and selling costs 28,235 33,964 43,411 51,055 57,740 20.3 27.8 17.6 13.1
Gross Profit 8,050 8,912 13,078 18,954 22,496 10.7 46.7 44.9 18.7
Expenses: - - - - -
Amortization 1,890 1,444 1,610 1,800 2,200 (23.6) 11.5 11.8 22.2
General and administration 1,874 2,229 2,815 3,400 4,000 18.9 26.3 20.8 17.6
Restructuring costs - - - - -
Provision for impairment of agreement receivable - - - - -
Financing charges 169 237 65 (125) (160) 40.2 (72.6) (292.3) 28.0
3,933 3,910 4,490 5,075 6,040 (0.6) 14.8 13.0 19.0
Income before income taxes 4,117 5,002 8,588 13,879 16,456 21.5 71.7 61.6 18.6
Income taxes - - - - -
Current 843 1,107 2,604 3,000 4,000
Future 460 615 257 1,858 1,760
1,303 1,722 2,861 4,858 5,760 32.2 66.1 69.8 18.6
Net income from continuing operations 2,814 3,280 5,727 9,021 10,696 16.6 74.6 57.5 18.6
Net income from discontinued operations - - 319 - -
Convertible subordinated debenture costs - - - - -
Non-controlling interest - - - - -
Net income 2,814 3,280 6,046 9,021 10,696 16.6 84.3 49.2 18.6
Earnings per share

Basic - reported 0.16 0.19 0.30 0.43 0.50 18.1 60.1 44.0 17.5
Diluted - reported 0.15 0.16 0.28 0.40 0.47 6.3 71.5 45.2 17.5
Diluted - from continuing operations 0.15 0.16 0.26 0.40 0.47 4.7 61.8 53.9 17.5

Basic 17.9 17.7 20.5 21.1 21.3 (1.0) 16.0 2.8 0.9
Diluted 19.6 19.3 21.9 22.5 22.7 (1.6) 13.8 2.4 0.9
Ratios (%):
Gross margin 22.2 20.8 23.2 27.1 28.0
General and administrative/revenue 5.2 5.2 5.0 4.9 5.0
Amortization/revenue 5.2 3.4 2.9 2.6 2.7
Interest expense/revenue 0.5 0.6 0.1 (0.2) (0.2)
Pretax margin 11.3 11.7 15.2 19.8 20.5
Income tax rate 31.6 34.4 33.3 35.0 35.0
Net profit margin 7.8 7.6 10.1 12.9 13.3
EBIT - normalized 4,286 5,239 8,653 13,754 16,296 22.2 65.2 59.0 18.5
EBIT margin (%) 11.8 12.2 15.3 19.6 20.3
Depreciation and amortization 1,890 1,444 1,610 1,800 2,200 (23.6) 11.5 11.8 22.2
Operating cash flow (EBITDA) - normalized 6,176 6,683 10,263 15,554 18,496 8.2 53.6 51.6 18.9
EBITDA margin (%) 17.0 15.6 18.2 22.2 23.1
Notes:
All values are based on a December 31 year end. Years 2004-2006 are pro forma estimates

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Stock Ratings:
Strong Buy 1: the stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX
Composite Index over the next six months.
Outperform 2: the stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve
months.
Market Perform 3: the stock is expected to perform generally in line with the S&P/TSX Composite Index over the next
twelve months and is potentially a source of funds for more highly rated securities.
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twelve months and should be sold.
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ZCL Composites ZCL T 7
Ra ymond James Ltd. - Canadian Institutional Equity T
Raymond eam
Team www.raymondjames.ca
Investment Research Institutional Equity Sales

Head of Investment Research Toronto (1-888-601-6105 Canada; 1-800-290-4847 USA)
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Retail
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Equity Research

ZCL Composites Stock Rating:

Financial Summary OVERVIEW

2 Raymond James Equity Research - Canada

• Leading-edge technology. ZCL has deep technical expertise in

Raymond James Equity Research - Canada 3

4 Raymond James Equity Research - Canada

EXHIBIT 1: ZCL F2006 REVENUE BY PRODUCT LINE

Source: Company documents, RJ Research estimates and analysis

Raymond James Equity Research - Canada 5

EXHIBIT 2: ZCL MANUFACTURING FACILITIES

EXHIBIT 3: ZCL HISTORICAL REVENUE GROWTH (F1998-F2006)

Source: Company documents, RJ Research estimates and analysis

6 Raymond James Equity Research - Canada

Source: Company documents, RJ Research estimates and analysis

Management and Ownership

Raymond James Equity Research - Canada 7

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Petroleum Downstream (Retail Market)

EXHIBIT 5: ZCL RETAIL PETROLEUM UNDERGROUND TANK

Source: RJ Research estimates and analysis

Raymond James Equity Research - Canada 9

Source: Company documents, RJ Research estimates and analysis

10 Raymond James Equity Research - Canada

Source: MJ Ervin & Associates, RJ Research estimates and analysis

Tank replacement Groundwater is used as a source of drinking water by approximately 25%-30%

Liability Risk Management

Raymond James Equity Research - Canada 11

Emergence of Alternative Fuels and Fuel Blends

12 Raymond James Equity Research - Canada

Raymond James Equity Research - Canada 13

Pioneering the Next Generation of Tank Lining

EXHIBIT 8: ZCL’S TANK LINING

Fibreglass Wall 3D Laminate

Source: Company Documents

14 Raymond James Equity Research - Canada

Raymond James Equity Research - Canada 15

Petroleum Upstream (Oil and Gas Production)

16 Raymond James Equity Research - Canada

Water Production (000's m3)

Raymond James Equity Research - Canada 17

160,000 Water Cut 90%

EXHIBIT 11: WEEKLY ACTIVE RIG COUNT (2004-2006)

Source: Rig Locator

18 Raymond James Equity Research - Canada

Additional Markets/Future Growth Markets

Raymond James Equity Research - Canada 19

Key Company Attributes

20 Raymond James Equity Research - Canada

Raymond James Equity Research - Canada 21

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EXHIBIT 12: ZCL QUARTERLY INCOME STATEMENT SUMMARY

Revenue 16,300 13,044 25.0 42,826 32,504 31.8

Earnings per share

Weighted shares outstanding (avg. in mln)

EBIT - normalized 2,839 1,708 66.2 6,670 3,555 87.6

Source: Company Documents, RJ Research estimates and analysis

Raymond James Equity Research - Canada 25

26 Raymond James Equity Research - Canada

Earnings per share