Team 10

Badger Daylighting (TSX:BAD) [BUY]

March 14, 2015

By: Rohan Sharma, Thomas Yang, Mitchell Li, Yash Patel, David Chan

Company Overview
Business Overview

Competitive Advantage

Badger Daylighting is North Americas largest provider of nondestructive daylighting services.

North Americas Largest Hydrovac Fleet 957 units

Faster response to larger projects using multiple units to get
work done

Primary customers are contractors and facility owners in the utility

and petroleum sectors. Other sectors include power generation,
transportation, industrial and engineering.
Market Cap: 835.46M
Share Price: $22.25

P/E 2015E: 16.8x

EPS 2015E: 1.36

In-house design, R&D, manufacturing

62,000 square feet facility to build trucks
Lower capital cost

D/E: 0.2 x
D/A: 36.38%

Segmented Analysis

Share Price Performance

500

300

200

Othe
r

Power Generation (nuclear,

coal, wind, solar)
Transportation (rail,
airports, roads)
Industrial (manufacturing,
processing, buildings)
Engineering
(transportation,
environmental, civil)

Oil & Gas; 55%

Utilities & Other; 45%

400

215.3
117.5

100
0
Badger Daylighting

Overview

Thesis

Valuation

Risks &
Catalysts

S&P/TSX Composite Index

Execution

Company Overview
How Do Hydrovacs Work?

Overview

Thesis

Valuation

Risks &
Catalysts

Execution

Company Overview
Highly-Experienced Management Team With Proven Track Record

Name

Tor Wilson

Gerald
Schiefelbein

John Kelly

Position

CEO/President

CFO & VP

COO

Background

Tor joined Badger in

June 2000. Prior
position include
Senior VP and COO
of Timberjack.
Timberjack was
purchased by John
Deere in April 2000.

Gerald joined
Badger in June
2014. Prior positions
include CFO for
Ivanhoe Energy and
BP Americas based
crude oil and refined
products trading
organization.

John joined Badger as

VP, U.S. Operations in
September 2011. He
was appointed COO
after doubling the size
of the U.S. company
within 3 years.

Overview

Thesis

Valuation

Risks &
Catalysts

Execution

Industry Overview
Impact of oil crash on Utilities, Energy and Infrastructure Industries
130%
120%
110%
101%
98%

100%
90%
80%
70%
60%
50%
40%
iShares US Utilities Index

S&P 500 Energy Sector Index

Crude Oil

North America Infrastructure Index

Canadian Infrastructure & Utilities Index

Impact of the decline in oil prices in negligible on the utilities and Infrastructure sectors.

Overview

Thesis

Valuation

Risks &
Catalysts

Execution

Industry Overview
Trends in the Utilities Sector
-

Utilities Sector Consolidation Continues

The sector has been consolidating consistently over the last few
years with deal sizes averaging $15B for an average premium of
20%
Consolidation is driven by low-cost capital and the push toward
pure-play regulated companies
Other drivers for the trend in aggressive M&A activity include:
- Cost cutting in a near-zero-growth environment
- Growing size and scale of resources required for large-scale
project orders

35

50
45

30

40
25

35
30

20

Oil and Gas Outlook

-

Deal Size ($ Billions)

Low oil prices may pose a threat to business prospects for small
and under-capitalized oilfield-service providers in 2015, while
presenting merger and acquisition opportunities for larger and
better-capitalized competitors
Servicers leveraged to US and Canadian land drilling may be
most at risk, as capital spending on exploration and production
drops
While oil-services companies will likely rein in spending to buy
time until a potential oil price recovery, that trend can only last
so long
During this period, well-capitalized will be able to hibernate their
way through while the competition thins out in the meantime

Overview

Thesis

Valuation

25 Deal Count
15

20
15

10

10
5

0
Deal Size

Risks &
Catalysts

Deal Count

Execution

Thesis I: Over-Adjustment to Oil Prices

Oil Exposure

Low Oil Prices Effect on Badger Daylighting

55% of Badgers clients are tied to the Petroleum-Related Infrastructure

and Oil Field Services segment. Management indicates that Badgers
pipeline exposure is from larger transmission pipelines as opposed to
upstream gathering lines.
Given the nature of the exposure to the oil market, Badger is only affected
indirectly by the price of oil. A regression of crude oil vs. TSX:BAD reveals
little to no material correlation between the movement of oil and the
movement of TSX:BAD.

In addition, Badgers exposure to oil refinery and storage segments are

highly inelastic to oil prices due to their necessity-based nature.
Revenue attributed to petroleum is indirectly tied to infrastructure as
the U.S. requires more infrastructure development in the future, this
demand will increase.
A drop in oil price does not directly affect Badgers firm value since their
existing operations are contract-based. If the clients are able to avoid
bankruptcy, all contracts will be paid in full.

Crude Oil vs. TSX:BAD Regression

Anticipated Oil Price Recovery

0.15

$80

0.1

$76.24

$75

Crude Oil Daily Return

$70

0.05

$68.02

$65

f(x) = 0.15x - 0
-0.1R = 0.04 -0.05

0
+ 0.01
0 f(x) = 0 ln(x)0.05

0.1

0.15

$60
$55

-0.05

$50

-0.1

$45

-0.15

$40

Badger Daylighting Daily Return

Overview

Thesis

WTI Futures

Valuation

Risks &
Catalysts

Brent Futures

Execution

Thesis II: U.S. Infrastructure Outlook

Favourable U.S. Outlook
Badger has shown its ability to significantly expand its U.S. operations in
recent years. In the U.S., over 100,000 miles of distribution gas need to
be replaced in the coming years. The American Society of Civil Engineers
estimates over $3.5T in U.S. infrastructure investment needed by 2020. In
addition, over 40,000 miles of pipeline are planned or under construction
in 2013 across North America. Capital expenditures for gas infrastructure
development are forecast at $205B through 2035.
The growing demand for Badgers services in the U.S. provides attractive
upside, and Badger is well-positioned to expand its U.S. market share.

Given the expanding U.S. infrastructure spending, Badger Daylighting is

well-positioned to drive earnings growth. If Badger is able to maintain its
market share in a growing market, the business will be able to drive
bottom-line growth. Given Badgers industry-leading position, if it is able
to expand its market share through increased efficiency and growing
revenue per truck per month, there is tremendous upside.
The U.S. market is largely untapped, and rapid expansion within the
southern U.S. would allow revenues to grow exponentially.

North America-Wide Coverage

Cash Available for Growth Capex

000's

Canada: 51
Cities

$65,825.00

Add: Proceeds on Disposal of Capital Assets

$406.00

Less: Required Principal Repayments of Long-Term Debt

Less: Maintenance CAPEX
Cash Available for Growth CAPEX and Dividends

US: 66
Cities

Overview

Funds Generated from Operations

Thesis

Valuation

Risks &
Catalysts

$3,229.00
$63,002.00

Execution

Thesis III: Adaptability to Environment

Similar Market Slowdown in 2009

Buildup in Free Cash Flow

In the last major decline in oil prices:

Badger stabilized the number of hydrovac units
Badger maintained profitability by adjusting output to
optimal levels
Reduced build rate substantially
Re-allocated functional trucks to areas of opportunity
Maintained regular dividend payment

When demand slows down, it increases the FCF position

Less growth CAPEX is necessary
BAD returns cash to shareholders through increased
dividends and/or share buybacks
Improve ability to pay interest and principal from debt
outstanding

Stabilization of Hydrovac Units in Crisis Times

15.0x

1,200
957

1,000
791

800

630

600
400
200

Narrowing Valuation Premium

334 313
241 285
212
136 162 184 185

407 412

504

12.5x

10.0x

9.4x

7.5x

7.0x
6.8x
6.1x

5.0x

Overview

Thesis

Valuation

Badger Daylighting (NTM EV/EBITDA)

Comparable Companies (NTM EV/EBITDA)

Avg. Badger Daylighting (NTM EV/EBITDA)

Avg. Comparable Companies (NTM EV/EBITDA)

Risks &
Catalysts

Execution

Comparable Companies Analysis

Company

Ticker

Price

Calfrac Well
Services
Total Energy
Services
Lonestar West
Matrix Service
Company
Essential Energy
Services
Metric
Mean
Median
Badger
Daylighting
P/E 2015E
EV/EBITDA 2015
E

Mkt
Cap
(MM)
763.3

TSX:CFW

$7.98
$47.1 423.5
TSX:TOT
6
64.7
TSXV:LSI
$2.35
NasdaqGS:MT $17.7 597.5
RX
6
148.5
TSX:ESN
$1.09
Mean

Badger`s
Denominat

or$22.2

TSX: BAD
5
20.0 x
1.36
7.9 x

118.0

EV
$835.5

P / Cash
EV /
Net
ROA
Flow
Debt /
EV
P/E
EV / EBITDA
EV / Sales Tangible
BV
Equity
2015 2016 LTM 2015
2015 2016
2015
(MM) LTM
E
E
E
LTM
E
E
LTM
E
9.5 x nm 31.9 4.6 x 2.4 x 4.0 x 10.3 5.5 x 0.6 x 0.8 x
1.7 x
0.9 x 3.6%
1,419.
x
x
9
474.8 10.9 8.6 x 17.8 6.3 x 5.9 x 4.8 x 4.8 x 7.2 x 1.1 x 1.1 x
1.3 x
0.2 x
20%
x
x
79.5 106.7 37.0 14.2 nm
nm 13.8 10.4 6.3 x 1.7 x 1.6 x
2.1 x
0.2 x
na
x
x
x
x
x
515.3 14.7 14.5 10.2 15.4 10.8 6.5 x 6.0 x 4.0 x 0.3 x 0.3 x
2.1 x
nm
7.5%
x
x
x
x
x
204.7 6.2 x 30.6 7.1 x 2.9 x 3.5 x 3.1 x 6.1 x 3.7 x 0.6 x 0.8 x
0.9 x
0.4 x 2.6%
x
35.5 20.0 18.5
Impliedx
x
x
8.8 x 6.4 x 7.3 x 7.9 x 5.7 x 0.9 x 1.0 x
1.8 x
0.4 x
10%
Sensitivity Analysis
12.8 14.5 16.0

x
x
x
6.3 x 5.9 x 5.7 x 8.1 x 5.9 x 0.9 x 1.0 x
1.9 x
0.2 x 7.5%
EV/EBITDA 2015E
Mkt Cap
Price
20.0 16.8 16.4
14.8
$941.9
9.3 x 8.0 x 9.0 x 8.2 x 7.8 x 2.3 x 2.2 x
5.0 x
0.2 x
x
x
x
6.9 x
7.4 x
7.9 x
8.4 x%
$27.20

$932.20

$826.05

Average Price

Overview

Thesis

$22.33
$24.76

Valuation

Div
Yield
Yield
6.3%
1.8%
na
na
10.2%
4.1%
4.1%
1.6%
8.9 x

19.0 x $22.49
P/E 19.5 x $22.83
2015 E 20.0 x $23.17

$23.29
$23.63
$23.97

$24.08
$24.42
$24.76

$24.88
$25.22
$25.56

$25.68
$26.02
$26.36

20.5 x $23.51

$24.31

$25.10

$25.90

$26.70

21.0 x $23.85

$24.65

$25.44

$26.24

$27.04

Risks &
Catalysts

Execution

Discounted Cash Flow Analysis

BADGER DAYLIGHTING - DCF

(in mm CAD$)
Unlevered Free Cash
Flow

2015E
FY

2016E
FY

2017E
FY

2018E
FY

2019E
FY

$13.8

$9.9

$55.5

$69.7

$46.1

6.00

11.5%

2019E EBITDA
Discount
TerminalPeriod
Multiple
Terminal Value
Discount Factor

$207.0
8.0x
$1,655.7

1.00

2.00

3.00

4.00

5.00

0.90

0.80

0.72

0.65

0.58

$960.7
80.8%

$4.1

$11.1

$7.1
$35.9

Discount
Rate
(WACC)

$40.4
10.5%
11.0%
11.5%
12.0%
12.5%

Total Enterprise Value

$1,188.5

Less: Debt
Add: Cash
Total Equity Value
Shares Outstanding

Overview

Fair Value per Share

2019E
FY

$4.6

WACC

Discounted Terminal Value

Discounted

% of Total EVFCF

$82.3
$8.6

2019E
FY

2019E
FY

2019E
FY

$79.5

7.00
8.00
9.00
Total Price Per Share
0.52
0.47
0.42
0.38
Terminal EBITDA Multiple

10.00

$25.4
7.5x
$30.0
$29.2
$28.5
$27.8
$27.1

$62.8

2019E
FY

$71.1

$24.0
7.0x
$28.3
$27.5
$26.9
$26.2
$25.5

$54.4

$26.3
8.0x
$31.7
$30.9
$30.1
$29.4
$28.6

$26.7
8.5x
$33.3
$32.5
$31.7
$30.9
$30.2

0.34
$26.8
8.5x
$33.3
$32.5
$31.7
$30.9
$30.2

$1,114.8
37.04

Thesis

$30.10

Valuation

Risks &
Catalysts

Execution

Risks and Catalysts

Risks
-

Commodity price risk is minimal given the 4% correlation between BADs share price and oil; however an extended commodity slump
may have broader implications on BADs overall revenue sources
- The current commodity slump is a non-recessionary one
Un-patentable hydrovac technology may affect BADs competitive advantage if others are able to also replicate its economics of scale
benefit
Pricing risk due to BADs tendency to keep its prices relatively constant, relying on effective asset mobilization and increasing asset
efficiency to compensate and maintain stable margins
Currency risk due to the possible emergence of an inverse trend with the USD returning to previous levels against the CAD as a 10% in
the CAD would decrease EBITDA by 5% (and vice versa)

Revenue Per Truck Per Month

Catalysts
-

$40,000

Oil price recovery may help the market correct its

overreaction and also slightly boost BADs earnings as well
The upcoming Q4 2014 earnings announcement on March
18, 2015 will expose the true impact of the oil price decline
on BADs bottom line as well as the year/year comparisons
versus Q4/13s rough winter
The gradual transition in revenue mix positions the business
well to pick up on macro demand headwinds
Increased consistency in revenue per truck per month

$35,000

$30,000

$25,000

$20,000
2005

Overview

Thesis

Valuation

2006

2007

2008

2009

Risks &
Catalysts

2010

2011

2012

2013

YTD

Execution

Execution

Investment Thesis

Argument I: Over-Adjustment to Oil Prices

Argument II: U.S. Infrastructure Outlook

Recommendation:
Buy and Hold
$22.2
Price March
5 Price
13:
Market
Entry
Price:
1.60
Dividend
%
Return:
$29.00
Target Price:

Argument III: Adaptability to Environment

Overview

Thesis

Valuation

Risks &
Catalysts

Execution

Appendix

Appendix

Appendix