What you need to know: • ADF is entering a multi-year growth phase due to major tailwinds in infrastructure spending and non-residential construction. • ADF spent the last two years adding a robotic fabrication line to its Terrebonne, Quebec facility, which has significantly expanded margins. • The Company has largely improved its balance sheet over the last year. • ADF currently trades at 3.6x FY25E EBITDA compared to steel fabricators at 7.0x and Canadian industrials at 8.3x. ADF Group Inc. (DRX:TSX, ADFJF:OTC) is a North American leader in the design, engineering, fabrication, and installation of complex steel structures for non-residential construction. ADF has posted a long-term track record of growing revenue and EBITDA, but we believe it has entered a multi-year growth cycle where it can post consistent growth and FCF generation. We are initiating coverage on ADF Group Inc. with a BUY rating and target price of $8.00/share. Investment Thesis Summary Entering a Growth Cycle with the Backlog to Prove It. ADF has a solid track record of growing revenue over its history, however, we believe it has entered a multi-year growth phase given the tailwinds in its key markets and expanded facility capacity. This is seen through ADF’s backlog which now stands at $374M and its H1/24 revenue of $160M which is up 19% YoY. Tremendous Tailwinds. ADF’s topline growth is supported by two significant themes, infrastructure spending and non-residential construction. North American infrastructure is reaching the end of its useful life and will need significant spending to rebuild. Non-residential construction has seen solid growth over the last few years, growing at a 16% CAGR in Canada and 10% CAGR in the U.S. Automation Leading Margin Expansion. ADF spent the last two years adding a robotic fabrication line to its Quebec facility, spending $21.5M and $11.5M in capex in FY22 and FY23 respectively. This has led to significantly increased throughput and margin expansion, with gross margins expanding from ~10% to ~20% and EBITDA margins expanding from mid-single-digits to the mid-teens. Improved Balance Sheet. ADF has largely improved its balance sheet over the last year, reaching a net cash position of $2.1M in Q2/24 compared to a net debt position of $44M in Q2/23. The clean balance sheet allows it to take on larger-scale projects that previously were not feasible due to working capital requirements. Family-Owned & Highly Incentivized. ADF was founded by Jacques Paschini in 1956 and was passed down to his children, Jean, Pierre, and Marise who collectively own 45% of the shares outstanding and 89% of the voting rights. As such, management is highly incentivized to optimize shareholder returns and not dilute shareholders (share count is flat over 10+ years with no options or warrants). Still a Value Stock. While ADF stock has rallied ~170% over the last year, it still only trades at 4.3x FY24E EBITDA and 3.6x FY25E EBITDA. This compares to other steel fabricators at 6.1x/7.0x and Canadian industrials at 9.0x/8.3x. ADF’s valuation translates to a 32% FCF yield on FY24E and 1.1x book value. We value ADF on 6.0x FY25E EBITDA, resulting in our $8.00/share target price.