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DRX: Signs Five-Year Contract for $35-40M Annually

What you need to know:
• ADF secured a five-year Québec energy contract for $35M-$40M annually, with a five-year extension option, totalling nearly $400M.
• The deal diversifies revenue outside the U.S. and adds long-term, recurring income, reducing exposure to market cyclicality.
• Q2 financials will be released in September, we are expecting revenue of $58.2M, 22% gross margin, and EBITDA of $10.0M.
• We recently published a management interview, watch it here.

This morning, ADF Group (DRX:TSX, ADFJF:OTC) announced a five-year contract with a repeat customer for an energy infrastructure project in Québec. The contract is for $35M to $40M in revenue annually, with an option to extend for an additional five years, which could total nearly $400M if extended. We find this very encouraging because ADF is showing that it can diversify outside of the U.S. and sign a longer-term recurring contract, reducing cyclicality. We also provide a preview of the Q2 financials below, which will be released in September. Last month, we conducted a management interview with CFO Jean-Francois Boursier, watch it here. We are maintaining our BUY rating and increasing our target price to $12.00/share (previously $10.00/share) on ADF Group.

Contract Announcement
ADF has secured a major long-term contract tied to a large-scale energy infrastructure project in Québec. The agreement spans an initial five years, generating between $35M to $40M annually, with the possibility to extend the deal for another five years. Production will begin in the coming months at the Terrebonne facility, with planned investments in new equipment and additional personnel to support the project. Assuming the extension, the contract could total almost $400M in revenue generated. ADF’s order backlog last stood at $330.4M as of April, and adjusting for today’s announcement, the pro forma backlog is now ~$400M (adding two years at the mid-point).

Our Take
We found today’s announcement quite impressive on two main fronts. Firstly, it shows that ADF can diversify its revenue outside of the U.S. (historically 85% of revenue), where tariff uncertainties are making clients more reluctant to working with ADF (despite its USMCA exemptions). Please refer to our last note (here) for a deeper discussion on the tariff situation. This also coincides with the “Buy Canadian Movement” where governments and companies look to prioritize Canadian suppliers. Secondly, this contract provides long-term predictable revenue for ADF, reducing the chances of a sudden decline in revenue as seen in H1/26. If ADF can prove out this trend, we believe the multiple will expand significantly as investors are currently concerned with cyclicality.