DRX: Sizeable Beat on Q1 Financials & Returning Cash to Shareholders
What you need to know:• ADF Group reported Q1 financial results that largely beat our estimates, including revenue of $107.4M (+34% YoY) vs. $90.1M and EBITDA of $23.1M (+130% YoY) vs. $17.2M.
• ADF announced a cash utilization strategy including its intention to repurchase up to 3.0M shares from insiders and the doubling of its semi-annual dividend to $0.02/share.
ADF Group (DRX:TSX, ADFJF:OTC) reported Q1 financial results today before market open that smashed our expectations across the board with the most notable beat being EBITDA coming in at $23.1M vs. $17.2M expected. Management also announced a cash utilization strategy, including the intention to repurchase up to 3.0M shares and double its semi-annual dividend. We reiterate that ADF Group is one of the highest conviction names in our coverage. We are maintaining our BUY rating and increasing our target price to $23.00/share (previously $20.00/share) based on 10.0x FY25E EBITDA (previously 9.0x).
Key Highlights
• Q1 revenue (ending April 30th) was $107.4M beating our estimate of $90.1M and $80.3M last year, representing 34% YoY growth.
• The order backlog came in at $427.5M (vs. $510.9M in Q4), excluding the $90M in new contracts announced on May 28th (see page two). 45% of the backlog consisted of fabrication hours, ADF’s highest margin offering.
• Gross margin for Q1 came in at 29.2% beating our estimate of 23.5% and 16.8% in Q1 last year. Management attributed this to better absorption of fixed costs, its automation equipment, and a favourable mix of projects.
• Q1 EBITDA was $23.1M (22% EBITDA margin, +130% YoY) compared to our estimate of $17.2M (19% margin) and $10.0M in Q1 last year (12% margin).
• EPS came in at $0.47 (or $15.3M in net income) compared to our estimate of $0.34/share (or $11.1M net income).
• ADF posted $1.2M in capex in Q1, translating to ($23M) in FCFF in Q1 as A/R increased by $42M.
• The Company ended the quarter with $48.4M in cash and $48.1M in debt. However, management indicated that its cash balance has exceed January 2024 levels subsequent to the quarter (>$80M).
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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