CASE STUDY: ADF Group (DRX.TO / ADFJF)

September 15, 2024

ADF designs and engineers complex steel structures including airports, stadiums, office towers, manufacturing plants, warehouse facilities, and transportation infrastructure.  Some of their sample projects include:

    • Miami International Airport
    • Lester B. Pearson International Airport (Toronto)
    • Logan Airport Pedestrian Bridges
    • One World Trade Center
    • Goldman Sachs HQ
    • M&T Bank Stadium (home of the Baltimore Ravens)
    • Ford Field (home of Detroit Lions)
    • Daimler-Chrysler Automotive Plant
    • Paccar (Kenworth Trucks) Assembly Plant Expansion
    • steel bridges and overpasses in Jamaica

Complex construction projects have higher pricing.  And there’s less competition for building them because few fabricators are equipped to do this work for these reasons:

    • A more specialized labor force is needed.
    • Strange angles mean more complex welding.
    • Larger components require a larger fabrication base and more lifting capacity.
    • Other special equipment is often needed.

ADF has two facilities – a 635k sqft plant in Quebec, and a 100k sqft plant in Montana.  Roughly 90-95% of revenues have come from the United States and only 5-10% from Canada.

Important Note: Although infrastructure spending can be cyclical, management believes that it has 3-5 years of revenue growth ahead of itself based on infrastructure spending needs across North America.

Here are the metrics of cheapness:

    • EV/EBITDA = 5.30
    • P/E = 8.6
    • P/B = 2.20
    • P/CF = 5.56
    • P/S = 1.10

The market cap is $288.83 million while enterprise value is $267.61. Cash is $56.3 million while debt is $34.9 million.

The Piostroski F_Score is 8, which is very good.

Insider ownership is 46%, which is outstanding. ROE is 30.67%, which is excellent.

Intrinsic value scenarios:

    • Low case: If there’s a bear market or a recession, the stock could decline 50%. This would be a buying opportunity.
    • Mid case: The current P/E is 8.6, but it should be at least 16.  That means fair value for the stock is at least $16.43, which is over 85% higher than today’s $8.83.
    • High case: Assuming a 10x EV/EBITDA for fiscal year 2025, the stock would be worth $22.69, which is over 155% higher than today’s $8.83.

 

RISKS

    • A Republican victory in the U.S. presidential election would be a negative for infrastructure spending.  However, ADF has not yet seen the benefit of the 2021 Infrastructure Bill, meaning that ADF’s revenue growth is not reliant on new government spending over the next few years.
    • A U.S. recession is quite possible, but ADF sees 3-5 years of revenue growth ahead.

h/t devo791 of Value Investors Club, who wrote up ADF Group here: https://valueinvestorsclub.com/idea/ADF_GROUP_INC/9574466948

 

BOOLE MICROCAP FUND

An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time. See the historical chart here: https://boolefund.com/best-performers-microcap-stocks/

This outperformance increases significantly by focusing on cheap micro caps. Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals. We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio. The size of each position is determined by its rank. Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost). Positions are held for 3 to 5 years unless a stock approachesintrinsic value sooner or an error has been discovered.

The mission of the Boole Fund is to outperform the S&P 500 Index by at least 5% per year (net of fees) over 5-year periods. We also aim to outpace the Russell Microcap Index by at least 2% per year (net). The Boole Fund has low fees.

 

 

 

Disclosures: Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. This material is distributed for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Boole Capital, LLC