Badger Daylighting Ltd

BAD : TSX : C$33.62 
BUY  Target: C$38.00

COMPANY DESCRIPTION: Badger Daylighting Ltd. is North America’s largest provider of non-destructive excavating services. Badger traditionally works for contractors and facility owners in the utility and petroleum industries. The company has a fleet of 791 hydrovac trucks (Q4/13) in the US and Canada. All amounts in C$ unless otherwise noted.

Infrastructure — Infrastructure Q4/13 AND 2013 REVIEW; BUILD RATE INCREASED OVER 35%; REITERATING BUY RATING AND INCREASING TARGET PRICE TO C$38.00 (FROM C$34.50)
Investment recommendation

We are reiterating our BUY rating and increasing our one-year target price from C$34.50 to C$38.00 following Q4/13 results and news that the build rate has now officially been increased to five trucks per week (comfortably above our previous forecast). We continue to view Badger as an exceptionally well-run company with a proven track record. Moreover: (1) activity levels remain healthy, with accelerating growth over the last two years; (2) long-term organic growth potential is excellent, particularly in the U.S. (although Canada continues its above- average growth too); (3) the company’s return on capital is well above average; (4) its valuation multiples are justified in the context of all of the above; and (5) it pays an attractive and supportable monthly dividend. We still think modest annual dividend increases are within the realm of possibility, but continue to note that available growth opportunities will likely compete for cash flow.
Valuation Our target price continues to be supported by our DCF model (discount rate of 11%). This equates to an EV/EBITDA multiple of 10.9 times our 2015 adjusted EBITDA estimate. Given Badger’s market leading position, unique business model (sustainable competitive advantage), organic growth potential (long runway) and trailing ROE of 25.7%, we think this multiple is justified

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