He initiated coverage of the Calgary-based modular workforce accommodation and space rental solutions provider with a “buy” recommendation, believing it provides investors with a “potent combination of top-line growth, solid cash flow, and upside from acquisitions.”
“Black Diamond benefits from strong macroeconomic tailwinds and is achieving robust rental rate growth as demand for modular buildings outstrips supply,” he said. “We see several positive catalysts for the name over the medium term, including (1) continued rate increases and organic fleet growth, (2) the expansion of LodgeLink, (3) additional acquisitions, and (4) the potential for a dividend reinstatement.”
In justifying his bullish stance, Mr. Lee pointed to a number of positive attributes, including a “well diversified” customer base, “attractive” unit economics, macroeconomic tailwinds that are driving “strong” demand and a “manageable” balance sheet.
“BDI trades at a significant discount to its comparables at 5.8 times enterprise value to fiscal 2022 estimated EBITDA versus Modular Space peers at 9.4 times and Workforce Solutions peers at 6.7 times,” he said. “While some of the disconnect relates to BDI’s relatively small size, we believe that the discount is excessively punitive given our expectations for mid-single-digit revenue growth, the company’s solid cash flow profile, and the potential for accretive acquisitions. We expect that as BDI continues to shift its business toward the faster-growing MSS business and develops its LodgeLink platform, shares will face a positive rerating.”
Seeing its valuation as “attractive” given its growth potential and cash flow, Mr. Lee set a target of $5.50 per share. The current average is $6.30.