A Member of Pat McKeough’s Inner Circle recently asked for his advice on a company that specializes in architectural metal work - ADF Group.
Pat likes the company’s healthy backlog, margin expansion, low debt, and diversified capabilities. However, he notes that the company’s client list is highly concentrated – this poses a higher level of risk for all but more aggressive investors.
ADF Group (Symbol DRX on Toronto; www.adfgroup.com), designs and engineers architectural metal work, including connections, heavy steel built-ups, and miscellaneous products. It provides these services from a 630,000-square-foot fabrication plant in Quebec and a 100,000-square-foot fabrication plant in Montana.
The company’s clients include general contractors, project owners, engineering firms and project architects, structural steel erectors, and other steel structure fabricators. Examples of its work include the 440-foot-tall spire at the top of the One World Trade Center tower in New York, and the three-dimensional trusses for the Mercedes-Benz Stadium in Atlanta.
ADF pays a semi-annual dividend of $0.02 a share in May and October. Its $0.04 annual payment yields 0.42%.
On December 11, 2023, the company announced it had signed $234.0 million in new contracts in the U.S. for work over the next couple of years. The largest of these contracts is for the second construction phase of a pharmaceutical company’s facilities in the U.S. Midwest.
Inner Circle: ADF Group’s revenue dips but earnings rocket 51.8% from a concentrated client base
In the quarter ended July 31, 2024, ADF’s revenue decreased by 6.6%, to $74.9 million from $65.0 million a year earlier. The decrease came mostly from construction site preparation delays related to one client. The company’s order backlog at the end of the quarter was $402.3 million. Projects currently in the backlog extend to January 31, 2026.
The company earned $16.0 million, or $0.51 a share, in the quarter. That’s 51.8% higher than $10.5 million, or $0.32, a year earlier.
ADF had $40.2 million in long-term debt as of July 31, 2024; that represents a low 14% of its market cap. It finished the quarter with $76.0 million in cash.
The company has a concentrated client base—three clients account for 82% of its revenue.
That kind of client concentration adds risk, but ADF is adding to its backlog, and the company continues to report rising sales in its competitive markets.
Recommendation in Pat’s Inner Circle: ADF Group is okay to hold, but only for aggressive investors.
