Quick Update: ADF Group (DRX.TO)
Update on Q2 '25 earning results, recent developments, what lead me to add to my position, and the future...
Disclosure: At the time of writing, I am long shares of ADFJF. I may add, reduce, or sell my position without notice. This write-up is strictly informative, includes my opinions and does not constitute as financial advice. Please do your own due diligence.
This morning, my largest position, ADF Group (DRX on Toronto Stock Exchange) / (ADFJF on OTC) posted Q2 ‘25 results. The stock sold off -18% most likely around concerns of a one-time construction delay and the U.S. election stated as a potential headwind to additional project backlog developments.
Q2 ‘25 Results:
Sales of: $74.9M CAD (-7% YoY), with a one-time $35M CAD delay from a steel installation project (that could be pushed into next two quarters)
Gross margins at 36.9%, compared to 22.2% in Q2 ‘23 (however, this is a bit deceiving as the $35M project delay would have brought down quarterly gross margins, given installation is a lower margin service)
A MASSIVE $82.4M CAD in Operating Cash flow generated in: Q2 ‘23
2.8 Million share repurchase agreement completed in June (~8.5% of shares outstanding)
Cash addition of $27.7M CAD since Q1 ‘25, with $76M in CAD cash equivalents
Brief Takeaways:
I have added to my already large position at ~$8 USD (ADFJF - OTC shares), as this quarter further compounds ADF’s great deal of financial optionality. Operating leverage has kicked in due to their automation project, and both gross and EBITDA margins came in much higher than anticipated. CFO, Jean-Francois Boursier iterated that ending receivables in Q2 were not as high as Q1, so we can assume that operating cash inflows will be lower in the 2nd half. However, with minimal CapEx requirements this year of $8M CAD in the Terrebonne facility, I am still anticipating a strong return of capital (both dividends and share repurchases) in either Q4 ‘25 or Q1 ‘26. Ultimately, ADF continues to have few M&A opportunities, doesn’t foresee much investment opportunity (outside of maintenance CapEx) in either facility, and have proven to take advantage of timely share repurchases and dividend growth opportunities.
Management expects gross margins to return to Q1 ‘25 levels, around the high 20% range. Nevertheless, nearly half the backlog for future projects are seen in their higher margin , fabrication projects, meaning margins may inflect higher at random in 2026, assuming more fab projects make their way into the backlog.
Future Risk: U.S. Election Results:
Concerns surrounding U.S. election results remain a risk, but one the market has over-dramatized, in my opinion. Former President Trump has discussed a 10% tariff on Canadian imports. However, the necessity of U.S. infrastructure upgrades along with the Canada-U.S.-Mexico trade deal, make this an unlikely development. In fact, Canadian ambassadors are already in discussions with the Trump administration, as it would pose a potential continental trade war. Back in 2019, when tariff talk occurred under a Trump administration, Steel was exempt, as Canadian steel fabs & manufacturers were deemed beneficial to the U.S., unlike rival nation counterparts (China and Russia).
The second concern of U.S. election results revolve around the timeliness of signing new contracts for ADF’s backlog. This was addressed in Q2 earnings by CEO Jean Paschini: “there is quite a few contracts right now that are in final negotiation.”, “everybody is waiting for the election in November”. As an American, I don’t see either party acting as a bottleneck to infrastructure spending. Although the re-shoring narrative has been adopted by both candidates, Canada is still a perceived ally of the United States, and management does not see a shift in steel cycle demand for at least 3 years.
Future Assumptions:
In the last 6 months, $DRX has produced $0.72 USD in EPS. If we assume a weaker 2H ‘25, I have ADF producing a conservative $1.20 USD in 2025 EPS, meaning the business is trading for a ballpark ~6x earnings. Given the cyclicality of the industry, it won’t ever trade for even 12x earnings, but 9x feels fair given the operating leverage that’s kicked in, over $400M in backlog, multi-year tailwinds of infrastructure spend, and the potential to return an estimated $75M USD in FCF to shareholders via dividends and share repurchases in the next 18-24 months. If they could provision $50M USD toward buybacks, they could cannibalize roughly ~20% of shares at these depressed levels. Finally, institutional ownership sits at roughly ~1%. Any additions to Canadian or small cap indices could make a material difference in multiple re-rating to my anticipated 9x Earnings.
In conclusion, I see a three-headed monster in $DRX shares… a capital return story, an earnings growth story, and a slight multiple expansion story taking place. I remain very bullish and optimistic for the next 18-24 months.
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God bless.