*Disclosure: I own shares in DRT. I am not a professional. Please do your own due diligence. Price: $0.81 CAD / 0.57 USD
MC: 109 million USD
EV: 112 million USD
1 year performance: +15.7%
DRT reported yesterday after the close and held a call this morning. Results were quite a bit behind my expectations with a weak guide and the stock was down 14% at one point. It closed today down 10%.
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Share *all numbers in USD unless stated otherwise
Quarter Recap
- Revenue came in at 38.9 million vs 41.2 million last year.
- Down 6%.
- Commercial revenue at 20.8 million vs 28.0 million last year. (-7.2 million).
- Healthcare at 9.2 million vs 4.8 million (+4.4 million).
- Government at 3 million vs 5 million (-2 million).
- Education at 4.6 million from 2.1 million (+2.5 million).
- EBITDA came in at -2.0 million vs 3.2 million last year.
- Impact from tariffs was 2.0 million in costs (5.1% of revenue).
- They are most impacted by the 25% tariff levied on the Canadian aluminum exports to the US (which increased to 50% in June).
- Pipeline is up 7% sequentially.
- Integrated solutions is contributing to their pipeline through projects executed with partners or in geographic markets where they have limited coverage.
- Pipeline at 310 million.
- 0.7 million due to professional services related to the Falkbuilt litigation.
- 0.5 million in salaries and benefits.
- 0.2 million in board fees and comp.
- 0.1 million in additional public company costs.
- There was an increase in G&A by 1.4 million.
- They have initiated tariff mitigation measures. Although we won’t see them make a material impact until Q4 2025.
- Expecting Q3 to be negative EBITDA, with them returning to positive EBITDA in Q4.
Call Notes
- Tariffs:
- The main impact is the 25% tariff on aluminum and steel.
- Aluminum is 10% of product revenue. The Savannah plant is also an aluminum plant and they have been working to increase loads.
- They have a lesser impact from tariffs on China. China is 6% of total raw material spend.
- Mitigation measures
- They have implemented a 5% increase on certain products. We won’t see the impact of this increase until Q4.
- They initiated a 3.5% surcharge in late Q2 that we should see some impacts in Q3.
Valuation
Now that DRT is not EBITDA positive, I am not going to bother with the EV/EBITDA valuation on a ttm basis or for 2025. I think at some point in the next 2-3 years, DRT eclipses 20 million in EBITDA. That would put it at about 5.5x EV/Dean’s-hopeful-EBITDA.
Closing Thoughts
I’m assuming the balance of the increased operating expenses is tied to the growth in the integrated solutions team and commercialization of ICE. This is something that I would like to get some more color on as we move forward.
Before looking at DRT in isolation, I think it’s worth checking in on the overall activity levels. I’m going to focus on commercial office as that is currently the largest segment for DRT. Overall industry activity is weak. The main area of growth (maybe the only area according to some sources) at the moment for industry is data centers. Commercial office construction is at multi year lows. The current amount of space under construction is the similar to the early 2010s. Overall vacancy rates are very high relative to historical standards. Even class A is office was at nearly 15% vacancy rates. This is better than class B/C as they are around 20%. Tenants are preferring class A, which is where I think DRT would compete better with traditional construction.
This is DRT’s commercial revenue relative to the overall million square feet (msf) under construction. The point is that DRT has vastly outperformed the industry as they have gained market share. I don’t think this changes and I’m expecting Q2 2025 to be the bottom for the overall industry.
DRT is controlling what they can, specifically:
- Tariff mitigation measures. The mitigation measures may not feel like enough for investors, but they have to think about the longevity of the business.
- Increase output of aluminum at the Savanah plant to impact on aluminum tariffs.
- Focusing on delivery of product on time and in full. This was at 99% for the quarter.
- The increased focus on integrated solutions and investing in that part of the business.
- Launch of the one-hour fire-rated wall which expands their scope for healthcare and life sciences.
- Expanding of pod-based solutions for the office market.
- The commercial launch of their ICE software.
- The indicators for the business internally are strong. The pipeline hit the highest since I have gone back to (Q1 2022). Leads are up over 3x since Q1 2022.
I know that it’s hard to own something when the short to medium term is uncertain. Especially when it seems like everyone on X is crushing it. I am still a believer in DRT. I did not properly anticipate what the tariffs would do to the business and should have lowered my expectations for 2025.
We are only about 10-15% above my average cost basis. I think there is a chance DRT drifts lower this quarter. There may be some shorter term shareholders that were excited by the share price momentum in 2024 that we need to churn through. Having said that DRT is pretty tightly held. Notable has been the exercise of rights by insiders.
I haven’t sold any shares at this point. I would consider adding to my position on some material weakness in the share price without any other indicators that the business is underperforming.
Maybe this is all mental gymnastics for me to continue being a bagholder here. Either way, I’ll continue to update readers.
Thanks for reading.
Dean
* long DRT.to