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DRX: Addressing the Bears & Q2 Preview

What you need to know:
• DRX stock is down 38% since reaching ATHs in June; we have aggregated some of the bearish points that we are hearing and provide our rebuttals as to why ADF will continue to be one of the best performing stocks on the TSX.
• ADF Group will be reporting Q2/25 financials in early September, we are expecting revenue of $92.6M (+15% YoY) and EBITDA of $17.9M (19% margin, +41% YoY).

ADF Group (DRX:TSX, ADFJF:OTC) is down 35% since reaching highs of $20.50/share on the back of its Q1 financials which largely beat our estimates (read here). From our various conversations with investors as well as commentary on social media, we have aggregated some of the bearish rationale and provided our rebuttals. We reiterate that ADF Group is one of the highest conviction names in our coverage and the current valuation is an excellent entry point for investors that missed the rally over the last year. We would also like to highlight that we published a management interview with CFO Jean-Francois Boursier last month, watch it here. We are maintaining our BUY rating and our $23.00/share target price on ADF.

Stock Buyback/Management Selling
On June 13th, ADF repurchased 2.8M shares from Jean, Pierre, and Marise Paschini at $17.31/share, for a total consideration of $47.9M. From our conversations, the street seems fairly mixed on this stating that while it is positive that ADF is repurchasing stock, management selling is a potential read-through for peaking financial performance. Our rebuttal to this is the classic quote, “Management sells shares for many reasons but buys shares for only one reason”. That reason being the increase in the Canadian capital gains tax that went into effect shortly after this transaction as well as taking some chips off the table, not the cycle turning over (see below). The Paschini family still owns a staggering 12.1M shares or 40%, showing that they are still aligned with shareholders. We will also note that ADF’s CFO subsequently purchased shares on the open market, totalling over $20K.

Is the Cycle Ending?
We will reiterate that management believes that it has 3-5 years of revenue growth ahead of itself given the infrastructure spending needs across North America. While it is true that U.S. non-residential construction spending growth has slowed (+5% in June compared to ~20% last year), these figures are still reaching new all-time highs every month and the architectural billings index remains at healthy levels (46.4 in June). We continue to believe that there is a long road ahead for North American infrastructure and the cycle will extend much further; please see our thematic note here.

This business is cyclical and it always has been (see historical revenue & multiples), but everything is indicating to us that this cycle is not over; revenue was up 34% last quarter, ADF signed $90M in new contracts in May, and similar companies continue to post strong results (i.e., Bird Construction, Hammond Power).

Tariff Rumours & Politics
In July, rumours emerged that Donald Trump is looking to propose a 10% tariff on imports and subsequently Canada began talks with members of Trump’s team to avoid this and receive the necessary exemptions. This risk is not specific to ADF and is not affecting other Canadian equities with exposure to the U.S. Furthermore, in the last tariff discussions in 2019, Canadian steel was exempt. Additionally, the timing of this announcement does not line up with the decline of ADF stock which was also down 34% by the time these articles were published.