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DRX: New Contracts Announced; Increasing Target Price (Again)

What you need to know:
• ADF announced the signing of a series of new contracts totalling $234M, adding to its backlog of $339M reported for Q3.
• This demonstrates ADF’s increased throughput and ability to take on larger projects due to its automation equipment and working capital position.
• We are increasing our target to $10.00/share based on increased estimates.

This morning, ADF Group (DRX:TSX, ADFJF:OTC) announced the signing of a series of new orders totalling $234M. We view the release as a strong positive following the stellar Q3 earnings posted last week, reinforcing our investment thesis and confidence in management. The new contracts demonstrate ADF’s increasing efficiency and throughput due to its automated fabrication line as well as key tailwinds in its end markets, leading to years of runway for growth. As such, we expect the momentum in DRX stock to continue. We are maintaining our BUY rating and increasing our target to $10.00/share (previously $9.00/share).

Contract Announcement
In May 2023, ADF announced the signing of a large-scale contract for the first phase of a major project in the pharmaceutical sector in the Midwest. This contract was amended today to include additional work within its original execution schedule; fabrication work will begin this month. ADF also announced that it has reached an agreement with the same client for the second phase of the project. The scope of the work is similar to the first phase, including design, engineering, supply of steel and industrial coating, fabrication, and installation. For phase 2, fabrication will begin in February 2024 and extend over 15 months. This contract represented the largest in the $234M series of contracts.

The series of orders also included a new contract in the Southeastern U.S. which included fabrication (including industrial coating) and delivery of a new industrial building for a global manufacturing company in the aluminum sector. This project will extend over six months. Lastly, the series of contracts included two new contracts in Canada within the public infrastructure and industrials sectors. Both fabrication plants will be involved with the new contracts. The backlog now stands at $573.3M and as such, we are increasing our estimates for Q4/24 and FY25 as seen in Figure 2. Our numbers still remain quite conservative given that we are expecting $424M in revenue over the next 15 months (>80% of the backlog should be contracted over 15-18 months or $459M).