BADGER DAYLIGHTING LTD. (TSX:BAD) SPECIAL SITUATIONS RESEARCH Recommendation: Buy 12-Month Target: $30.30 Implied Total Return: 7.5% COMPANY DESCRIPTION: Badger Daylighting is rth America s largest provider of non-destructive hydrovac truck excavating services, targeting the utility and petroleum sectors. The Company has over 1,000 hydrovac trucks that services a diverse customer base across Canada and the United States. October 6, 2016 Event. Meeting with Management. Summary. We met with Badger s CEO and CFO for an update. Based on our meeting takeaways, we are updating our 2016/2017 estimates ahead of their Q316 results in early vember, to account for a smooth leadership transition, favorable CAD/USD outlook, and an improving business environment. Management Update. The transition of Paul Vanderberg replacing long time CEO Tor Wilson, has been progressing favorably, and ahead of our expectations. We had initially maintained our H2/16 outlook, as we wanted to see how the CEO transition would affect the focus and strategy of the business going forward. Following a smooth transition, we feel comfortable increasing our outlook for the Company in H2/16 and F17. Estimates. We make the following adjustments to the model: Increase revenue per truck ( RPT ) estimates by 2.9% in H2/16 and 1.4% in F17, to achieve full year averages of $24,161/month and $27,375/month, respectively. Bumped gross margin 57bps in H2/16 and 20bps in F17. Reduced F17 truck build rate from 2.5 trucks/week to 1.25/week. Adjust our CAD/USD foreign exchange estimates down from 0.78 to 0.76 for the remainder of 2016 and 2017. Outlook. Overall, the Company is ahead of our expectations on the recent management change, and key markets (Eastern Canada and USA) are continuing to show improvements. We see weakness in the O&G regions nearing the bottom, and seasonal business activity should improve utilization in H2/16. S/O (bas.) 37.1m Last Close Price: $28.55 S/O (dil.) 37.5m Implied Total Return: 7.5% Market Cap: $1,059.2m Monthly Dividend $0.033 EV: $1,093.0m Implied Yield: 1.4% Revenue $422.2m $404.6m $388.7m $443.0m y/y growth % -4.2% -3.9% 14.0% Adj. EBITDA $120.1m $107.8m $100.5m $115.3m y/y growth % -10.3% -6.7% 14.7% Net Profit $53.1m $38.5m $31.1m $45.8m EPS (Dil.) $1.40 $1.03 $0.83 $1.22 Net Debt $105.2m $78.9m $33.8m -$15.1m Total Capex $98.5m $38.2m $22.2m $24.0m P/Sales 2.5x 2.6x 2.7x 2.4x P/Earnings 20.4x 27.8x 34.5x 23.4x EV/Adj. EBITDA 9.7x 10.6x 10.9x 9.5x Net debt/adj. EBITDA 0.9x 0.7x 0.3x -0.1x Hydrovac Fleet 998 1018 1029 1049 Key Personnel Paul Vanderberg Gerald D. Schiefelbein John G. Kelly Source: Acumen Capital Partners, Sedar Figures subject to rounding President & Chief Executive Officer VP & Chief Financial Officer Chief Operating Officer We have a new target price of $30.30/sh (from $27.30/sh), which is based on our increased estimates, updated f/x assumptions, and an adjusted DCF calculation. ACUMEN CAPITAL FINANCE PARTNERS LIMITED SUITE 700 404 6 th AVENUE SW CALGARY, AB T2P 0R9 MAIN PHONE: 403.571.0300 TOLL FREE: 1.888.422.8636
Page 2 of 5 CORPORATE UPDATE We had initially maintained our H2/16 outlook on Badger following a strong Q216 results (VIEW REPORT), as we wanted to see how the CEO transition efforts would affect the focus and strategy of the business going forward. Following 2+ months on the job, new CEO Paul Vanderberg looks to be a strong fit for the role, and has alleviated Acumen s concerns over any potential transitional issues. Mr. Vanderberg s strategic views and experience look to blend well with the existing business model, with new operational procedures already in the process of being implemented. These policies will not lead to immediate improvements on the bottom line, but instead will improve the corporate framework and HR related matters, that will undoubtedly increase the Company s success long term. OUTLOOK The Company will likely remain constrained in the O&G regions until commodity prices improve, however, the changes implemented in Eastern Canada look to be paying off quicker than expected, and the business continues to deliver on strong US penetration. Management integration appears to have progressed ahead of expectations, which we believe has been a significant concern in the market and impacting share performance. We reiterate our key areas of focus for Badger below (with status updates), which will allow us to gain further traction on the outlook moving forward. These include: Continued US growth in non-o&g markets. (Showing strong growth) Additional business development in current O&G markets. (Ongoing) Further improvement with Eastern Canadian operations. (Progressing ahead of schedule) Margin stability and strong FCF. (In-line with previous downturns) Further clarity on the new CEO s strategy going forward. (Confirmed) Ultimately time will tell if Badger s focus on cost containment and business development strategy can deliver on the growth expected by management and the market. However, the Company looks to be transitioning well, and we will be looking to Q316 results in early vember for further confirmation. ESTIMATES We make adjustments to our model based on our discussions with management and what we believe is an improved outlook. We outline our new estimates for 2016 and 2017 in figure 1. We have adjusted our H2/16 and F17 RPT forecasts upwards to reflect our current outlook and outline the changes in figure 1. FIGURE 1 BADGER DAYLIGHTING UPDATED RPT ESTIMATES Revenue per Truck New Old % Diff Revenue per Truck New Old % Diff Q1/16 RPT (actual) $21,105 $21,105 0.0% Q1/17 RPT $26,500 $26,000 1.9% Q2/16 RPT (actual) $23,038 $23,038 0.0% Q2/17 RPT $25,500 $25,000 2.0% Q3/16 RPT $26,500 $26,000 1.9% Q3/17 RPT $28,500 $28,000 1.8% Q4/16 RPT $26,000 $25,000 4.0% Q4/17 RPT $29,000 $29,000 0.0% 2016 RPT $24,161 $23,786 1.6% 2017 RPT $27,375 $27,000 1.4% BAD appears to have made reasonable operational progress since our last update. As a result, we are comfortable increasing our gross margin expectations by 57bps in H2/16 and 20bps in F17 to 30.6% and 31.2%, respectively. We adjust the corporate truck build rate down to reflect management s strategy of increasing utilization, rather than fleet size in the near term. More specifically, we are cutting our F17 build rate in half, from 2.5 trucks/week to 1.25/week, which reduces our growth capex expectations by $24.0MM ($8.0MM vs $32.0MM), and lowers the YE17 fleet size to 1,049 trucks (from 1,109 previously). changes were made to our maintenance replacement expectations, which
Page 3 of 5 remain at 40 trucks in F17. Additionally, our foreign exchange estimates have been adjusted downwards to 0.760 CAD/USD (from 0.780) for the remainder of 2016 and 2017 to mimic the current forward strip outlook. FIGURE 2 BADGER DAYLIGHTING OLD VS. NEW ESTIMATES *Before growth capex VALUATION We utilize a peer based EV/EBITDA multiple and DCF analysis to arrive at our target price. We outline Badger s peer group in figure 3 and highlight the Company s superior EBITDA margins, high rates of return on invested capital, and balance sheet strength as reasons why Badger should trade in line (if not at a premium) to the group. FIGURE 3 BADGER DAYLIGHTING PEER GROUP BADGER DAYLIGHTING LTD. BAD-TSX $28.55 $1.1B $1.1B 34.5x 23.4x 10.9x 9.5x 16.1% 0.3x 1.4% 30.0% 26.4% Source: Bloomberg, Capital IQ, Acumen Capital Partners, Figures subject to rounding We have a new target price of $30.30/sh (from $27.30/sh), which is based on our revised estimates, updated f/x assumptions, and to rolling our five year DCF calculation forward beginning in F17 (previously F16). FIGURE 4 BADGER DAYLIGHTING VALUATION SUMMARY Valuation Metric Factor Implied 12-month share price ($) F17E EV/EBITDA 9.6x $30.24 DCF Analysis 8.6x / 10.4% $30.46 Mean (rounded) $30.30 RECOMMENDATION F16 New F16 Old Change F17 New F17 Old Change Revenue per Truck $24,161 $23,786 1.6% $27,375 $27,000 1.4% Revenue $388.7m $380.6m 2.1% $443.0m $442.3m 0.2% Gross Profit $115.7m $112.1m 3.2% $133.0m $131.9m 0.8% Adj. EBITDA $100.5m $96.9m 3.8% $115.3m $114.2m 0.9% Free Cash Flow* $44.6m $42.0m 6.2% $59.3m $59.6m (0.3%) Net Income $31.1m $28.6m 8.7% $45.8m $42.9m 6.8% EPS (Dil.) $0.83/sh $0.76/sh 8.7% $1.22/sh $1.14/sh 6.8% Net Debt $33.8m $32.7m 3.2% -$15.1m $10.6m nm Price Enterprise P/E EV/EBITDA ROIC Net Debt/ Dividend GM % EBITDA % Peer Group Ticker 10/4/2016 Market Cap Value 2016F 2017F 2016F 2017F 5-yr Avg. EBITDA Yield TTM TTM Enviromental & Facility Services CLEAN HARBOURS, INC. CLH-US $48.55 $2.8B $4.0B 100.7x 42.2x 9.2x 8.1x 5.0% 3.0x - 28.5% 13.6% WASTE MANAGEMENT INC. WM-US $62.41 $27.6B $36.5B 21.9x 20.1x 10.0x 9.5x 7.4% 2.7x 2.5% 37.6% 26.2% Construction & Engineering AECON GROUP INC. ARE-TSX $18.17 $1.0B $1.1B 18.8x 15.1x 5.9x 5.4x 7.0% 0.9x 2.2% 9.7% 7.8% Trucking TRANSFORCE INC. TFI-TSX $27.07 $2.5B $4.1B 18.4x 14.9x 9.6x 9.5x 8.1% 2.0x 2.5% 43.2% 10.8% Oil & Gas Equipment Services MULLEN GROUP LTD. MTL-TSX $16.40 $1.7B $2.3B 27.9x 31.1x 11.5x 12.4x 9.0% 2.2x 7.3% 31.6% 17.0% SECURE ENERGY SERVICES INC. SES-TSX $9.62 $1.5B $1.8B nm nm 20.8x 12.7x 4.1% 2.6x 2.5% 2.1% -7.8% Mean 37.5x 24.7x 11.2x 9.6x 6.8% 2.3x 3.4% 25.4% 11.3% As a result of the increase in the target price, we continue with our BUY recommendation. Key investment attributes include: resilient FCF generation, balance sheet strength, and ROIC.
Page 4 of 5 ISSUER: Badger Daylighting Ltd. (TSX:BAD) Disclosure Requirements Is this an issuer related or industry related publication? Issuer Industry Does the Analyst/Associate have a financial interest in securities of the subject issuer? If yes, nature of interest: Is Acumen Capital Partners a market maker in the issuer s securities at the date of this report? Does Acumen Capital Partners beneficially own more than 1% of any class of common equity of the issuer? Does Acumen Capital Partners or the Analyst/Associate have any actual material conflicts of interest with the issuer? Explanation: Does the Analyst/Associate or Household member serve as a Director, Officer, or Advisory Board Member of the issuer? Has the Analyst/Associate received any direct compensation from the subject company in the past 12 months?* Has Acumen Capital Partners managed or co-managed an offering of securities by the issuer in the past 12 months? Has Acumen Capital Partners received compensation for investment banking and related services from the issuer in the past 12 months? Other disclosures: * Acumen has a pool for compensation purposes, which includes research analysts, investment banking personnel, sales people and institutional traders. Revenue in the pool includes trading commissions, advisory fees, new issue commissions and broker warrant proceeds. Acumen Recommendation Structure: Buy, Speculative Buy, Hold, Reduce, Under Review, Tender Full Recommendation Structure explanation can be found at the Acumen Capital Partners website: www.acumencapital.com The information transmitted is privileged, confidential, may be subject to copyright and is intended solely for the use of the individual or entity to which the transmission is addressed. This transmission is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any securities discussed herein in any jurisdiction where such would be prohibited, nor in any jurisdiction where Acumen is not registered to do so. The views expressed are those of the sender and not necessarily those of Acumen Capital Finance Partners Limited or its subsidiaries. Any unauthorized use, distribution, review or disclosure is prohibited. If you received this in error, please notify the sender and delete or destroy this message and any copies. Acumen does or seeks to do business with companies covered in our research comments and reports. As a result, investors should be aware that the firm may be in a conflict of interest. Investors should consider this report as only a single factor in making their investment decision 2016.
Page 5 of 5 ACUMEN CAPITAL STAFF LIST RESEARCH Brian D. Pow, MBA Vice President Research, Equity Analyst (403) 571-0303 bdp@acumencapital.com Trevor Reynolds Oil and Gas Research Analyst (403) 410-6842 treynolds@acumencapital.com Mike McMeeken Research Associate (403) 571-0530 mmcmeeken@acumencapital.com Nick Corcoran Research Associate (403) 410-6840 ncorcoran@acumencapital.com INSTITUTIONAL SALES Brian Parker President & CEO, Institutional Sales (403) 571-2514 bparker@acumencapital.com Andre Drouillard, CFA Vice President, Institutional Sales (403) 571-0685 andre@acumencapital.com Robert Cooper, CFA Institutional Sales (403) 571-0324 rcooper@acumencapital.com TRADING Liam Farrell Vice President, Head of Institutional Trading (403) 571-0318 lfarrell@acumencapital.com David Waite Institutional Trading (403) 410-6730 dwaite@acumencapital.com Jesse Ahlan Institutional Trading (403) 571-0148 jahlan@acumencapital.com Crystal Bellefountaine Associate (403) 571-0314 cbellefountaine@acumencapital.com INVESTMENT BANKING Kelly Hughes Vice President, Investment Banking (403) 571-5036 khughes@acumencapital.com Ian Thomson Vice President, Investment Banking (403) 571-0301 ian@acumencapital.com Shawn Ostrow Investment Banking Associate (403) 571-0319 sostrow@acumencapital.com RETAIL SALES Robert Laidlaw Vice President (403) 571-2522 rlaidlaw@acumencapital.com Imran Mulji Investment Advisor (403) 571-0112 imulji@acumencapital.com Loredana Alaia Associate Investment Advisor (403) 441-0536 lalaia@acumencapital.com Sheldon LeLievre Vice President, Sr. Investment Advisor (403) 571-0315 sheldon@acumencapital.com Craig Madill Investment Advisor (403) 410-6018 cmadill@acumencapital.com Erin Williams Investment Advisor Assistant (403) 571-2416 ewilliams@acumencapital.com Donny Woo Vice President, Sr. Investment Advisor (403) 571-2510 donny@acumencapital.com Darren Fong Investment Advisor (403) 441-2754 dfong@acumencapital.com Matthew Wiens Investment Advisor (403) 441-5672 mwiens@acumencapital.com Alan Tolg Investment Advisor (403) 410-2042 atolg@acumencapital.com Ron Cairns Investment Advisor (403) 410-2040 rcairns@acumencapital.com Scott Barnett Investment Advisor (403) 571-0532 sbarnett@acumencapital.com Curtis Schirrmacher Investment Advisor (403) 571-0113 curtiss@acumencapital.com Preston Smith Investment Advisor (403) 571-2195 psmith@acumencapital.com Grant Gowland Associate (403) 441-0537 ggowland@acumencapital.com TREASURY AND OPERATIONS Cindy Marthaller Operations Manager (403) 571-8045 cindy@acumencapital.com Myja Miller CFO, COO (403) 571-0308 mmiller@acumencapital.com Govind Achyuthan Chief Compliance Officer (403) 571-0689 govind@acumencapital.com Krystine Hebert Client Services (403) 571-0300 khebert@acumencapital.com Acumen Capital Finance Partners Limited Main Phone: 403-571-0300 Trading Toll Free: 1-866-410-9039 Suite 700, 404 6 Avenue SW Calgary, AB T2P 0R9 www.acumencapital.com