DRX: Revenue Misses due to Delays but Margins Smash Expectations
What you need to know:• ADF reported mixed Q2 financials that missed our revenue estimate due project delays but largely beat our profitability estimates.
• Revenue came in at $74.9M vs. our $92.6M (due to $35M in delays) while EBITDA came in at $24.9M (33% margin) vs. our estimate of $17.9M.
• Management remained bullish on the long-term growth of the sector and ended the quarter in large net cash position.
This morning, ADF Group (DRX:TSX, ADFJF:OTC) reported Q2 financial results (ending July 31st) that missed our estimates on revenue due to delays with one client but largely smashed our estimates on profitability. Notably, EBITDA margin came in at 33% vs. our expected 19%. Despite the delays (which are par for the course given the industry and client concentration), we remain highly bullish on ADF. In case you missed it, we recently published a rebuttal to the bearish comments (read here) and a management interview (watch it here). We are maintaining our BUY rating and $23.00/share target price on ADF Group.
Key Highlights
• Revenue came in at $74.9M, missing our estimate of $92.6M and representing a -7% YoY decline. This was due to one client’s delays in construction site preparation, pushing forward $35M in revenue (implying $109.9M, +37% YoY). Management commented that 300 truck loads of fabricated steel are waiting for delivery, however, there is a risk that this gets pushed to FY26. We remind readers that ADF’s revenue is highly concentrated amongst 3-4 clients each quarter, meaning this is part of the business and can occur any quarter.
• The order backlog came in at $402.3M (+8% YoY, -24% QoQ), after adding the $90M in new contracts announced on May 28th. 45% of the backlog consisted of fabrication hours, ADF’s highest margin offering.
• Gross margin for the quarter was 36.9%, smashing our estimate of 23.7% and 22.2% in Q2 last year. Management attributed this to better absorption of fixed costs, automation, and a favourable product mix.
• EBITDA of $24.9M (33% EBITDA margin, +97% YoY) compared to our estimate of $17.9M (19% margin) and $12.6M in Q2/24 (16% margin).
• EPS of $0.51 (or $16M in net income) compared to our estimate of $0.39/share (or $11.5M net income).
• ADF spent $4.5M in capex in the quarter, translating to $78.1M in FCFF in Q2 as A/R decreased by $71.4M. The Company ended the quarter with $76.0M in cash and $47.2M in debt.
ADF Group is engaged in the design and engineering of connections, fabrication and installation of complex steel superstructures, heavy steel built-ups, as well as architectural and miscellaneous metalwork for the five principal segments of the non-residential construction market namely, office towers and high-rises, commercial and recreational buildings, airport facilities, industrial complexes and nuclear facilities, and transport infrastructures.
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