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DRX: Facility Visit & Updates; Staying Bullish

What you need to know:
• Our team visited the Terrebonne facility earlier this week, where we toured the plant and met with management.
• The Trump victory has mixed implications, with general support for infrastructure spending but potential to defund spending packages and implement tariffs on imported steel.

Earlier this week, we had the pleasure of visiting ADF Group’s (DRX:TSX, ADFJF:OTC) Terrebonne facility. We summarize the takeaways from our visit as well as other updates from the sector including the Trump victory, Canadian tariffs on Chinese steel, and airport infrastructure funding. We are maintaining our BUY rating and $23.00/share target price on ADF Group.

Facility Visit
On November 5th, our team visited ADF’s Terrebonne facility and met with CEO Jean Paschini and CFO Jean-Francois Boursier. We were quite impressed by the scale of the facility and automation equipment (see Figure 1). We also got a chance to see the excess capacity and opportunity to expand the facility if this infrastructure cycle continues as we expect. Management reiterated that they continue seeing delays in decision-making for new contracts but expects the environment to improve over the coming months. We remind readers that ADF signed $234M in new contracts in December 2023 and $228M in new contracts in December 2022.

Implications of the Trump Victory
Donald Trump and the Republicans have been generally supportive of increasing infrastructure spending over the years, in order to support the economy and create jobs. However, not much materialized during Trump’s previous presidency in terms of spending packages. The 2024 Republican platform states that it will focus on industry, manufacturing, infrastructure, and workers, but does not offer any specific policies relating to ADF’s markets. However, back in July, Trump indicated that he intends to defund some of the existing initiatives including the Infrastructure Act, Inflation Reduction Act, and CHIPS Act, specifically relating to clean energy funding.

Regarding tariffs, Trump aims to protect American jobs and reduce dependence on foreign steel. This could include a blanket 10% tariff on all imports but is largely targeted at China. We remind readers that Canada was exempt from the steel tariffs in 2019 and the Canadian government has already begun discussions with Trump’s camp to avoid such tariffs. Additionally, ADF has excess capacity at the Great Falls, Montana facility, where fabrication can be shifted to.

Canada Places Tariffs on Chinese Steel
On October 18th, Canada’s Department of Finance implemented a suite of tariffs on Chinese imports. This included a 25% tariff on steel and aluminum products imported from China, effective October 22nd. This is a bullish development for the sector as Canada looks to protect its domestic steel industries and plays into the on-shoring trend we are seeing on both sides of the border. ADF does not source any of its steel from China.

Industry Updates
On October 24th, the U.S. Federal Aviation Administration awarded $970M in funding from the Bipartisan Infrastructure Bill to 125 airports across 46 states. The package includes funding for new baggage systems, security checkpoints, gate capacity, and modernizing aging infrastructure. We remind readers that ADF has worked on various airport projects across the U.S. (see list here). U.S. non-residential construction spending for August increased 5% YoY to $1.2T, marking another month of ATHs.