Grande West Transportation (BUS-V) Watch Your Blind Spot, BUS is Flying in the Vicinity Initiating Coverage BUY $2.50 January 30, 2017 Last Price $1.77 Ahmad Shaath, CFA, MBA 12-month Target Price $2.50 Analyst - (416) 507-3964 Potential Return 41% [email protected] Dividend Yield 0.0% 52 Week Price Range $0.35 - $1.99 We are initiating coverage of Grande West Transportation Group with a Estimates BUY rating and a target price of $2.50. In summary, our YE: Dec 31st FY16E* FY17E FY18E recommendation is based on the following: Revenue ($MM) $14.5 $73.3 $105.8 EBITDA ($MM) ($3.5) $8.1 $12.5 A Bus By Transit for Transit: Grande West’s Vicinity bus was born as FD EPS ($0.09) $0.10 $0.15 a result of a partnership between Grande West and BC Transit, * 16 months year ending Dec. 31st, includes stub quarter ignited by the latter’s need for a bus that is the “right size” to deploy on routes and communities with lower density. The Vicinity Valuation * was developed with continuous input and feedback from BC FY16E FY17E FY18E Transit, completing a 21-month beta test program throughout BC’s EV/Sales 7.7x 1.5x 1.1x various terrains and weather conditions. EV/EBITDA nmf(neg) 13.9x 8.9x P/E nmf(neg) 17.0x 12.1x Snuck In From the Blind Spot: We believe GW is on the cusp of Stock Data (MM) establishing a foothold in an industry with high barriers to entry, Shares Outstanding which makes it a great investment opportunity. The company Basic 62.6 Assumes conversion of debentures leveraged its partnership to record its first sales into Canadian FD 70.5 public transit agencies, then successfully continued to gauge Market Cap interest and feedback to develop new offerings (30 and 35-foot) Basic $110.8 that have been quickly adopted by the market. The company FD $124.8 capitalized on an opportunity that was ignored by incumbents, successfully growing its order book to over 175 buses for delivery in Net Debt $0.90 Pro-forma 2017. EV $111.7 The Need for Fleet Optimization: Public transit agencies in the U.S. About the Company carry on average less than 11 people, while their fleets’ average capacity is 58 passengers, yielding a utilization level of 18%. Grande West Transportation Group is a Canadian company that design, engineers and manufactures heavy-duty, medium-sized buses Additionally, they rely heavily on public funding for capex (95%) for public transits and private entities in Canada and the U.S. The and ppex (62%). Faced with limited options to optimize their company's main product is the Vicinity bus which comes in 27.5, 30 service network, we believe their operations could be optimized and 35-foot sizes and was developed in cooperation with BC Transit. by streamlining their fleet to better match their capacity needs similar to their Canadian counterparts. We believe the target All prices in C$ unless otherwise indicated market for this opportunity is at least 7,800 vehicles. Stock Performance On The Cusp of Immense Growth: GW’s Vicinity bus just qualified for “Buy America” program, opening up the federally-funded public transit bus market. With new infrastructure spending measures expected to continue to grow at 4% CAGR, and a need for fleet optimization by a significant number of U.S. Public transit agencies, GW sits on the cusp of immense growth trajectory that could lead it to a revenue run-rate of at least ~$175 million. Consequently, we are initiating coverage with a BUY rating and a $2.50 price target using a DCF12% approach. We believe the company sits in a “once-in-a-life time” opportunity to become an established transit bus provider. Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830|www.beaconsecurities.ca Grande West Transportation Table of Contents Investment Thesis ....................................................................................................................... 3 Public Transit In North America ................................................................................................... 4 Company Overview ..................................................................................................................... 9 Market Opportunity ................................................................................................................... 16 Competitive Landscape ............................................................................................................. 18 Financial Analysis ..................................................................................................................... 20 Valuation: What’s It Worth? ....................................................................................................... 22 Potential Catalysts .................................................................................................................... 22 Key Risks .................................................................................................................................. 23 Initiating Coverage with a BUY Rating and a $2.50 Target Price ............................................... 24 Appendix A: Consolidated Financials ........................................................................................ 25 Appendix B: Management & Board ........................................................................................... 26 Appendix C: Anecdotes from Vicinity’s Initial Trials ................................................................... 28 Appendix D: Summary of the U.S. Largest Public Transit Agencies by Bus Fleet ..................... 31 January 30, 2017 |Page 2 Ahmad Shaath | 416.507.3964 | [email protected] Grande West Transportation Investment Thesis The strain that public transit exerts on government budgets is undeniable. U.S. transit agencies spent nearly US$50 billion to fund their capex and opex in 2015. What is alarming is that these agencies rely on this funding not only to cover their capex, but also to fund more than 62% of their opex. This, however, should not be surprising when one considers that public transit buses in the U.S. carry less than 11 people on average, a mere 18% utilization rate. As transit agencies are an arm of the government, however, bankruptcy is not an option and they have much less freedom, if any, in deciding their service networks. They must provide service to the public, on many uneconomical routes as well. However they do have freedom in choosing what bus fleet to operate. Today, more than 65% of their fleet is comprised of 40-foot and larger buses, vehicles with capacity for more than 60 passengers. However, this old format maybe in the process of changing dramatically. We believe Grande West Transportation Group (“GW” or “Company”) with its Vicinity bus, a medium-sized, agile yet heavy-duty vehicle, gives transit agencies a compelling option to streamline their fleets. The company started in cooperation with BC Transit to address this very specific issue, simply “right sizing”. The Vicinity has been very successfully adopted by many Canadian transit agencies serving less-dense areas, helping them cut operational costs by more than 20%, in addition to allowing them to expand their service during off-peak hours or by adding new routes. Having initially entered the market with 27.5-foot bus, Grande West successfully grew its offerings to 30 and 35-foot size, offering the same advantages with great success. Grande West’s current order backlog sits at 175 buses in Canada and the U.S. private market alone. Having recently qualified for “Buy America” program allowing it to bid for public transit tenders in the U.S., we believe Grande West is just starting its growth trajectory towards delivering more than ~400 buses annually and $175 million in revenue over the next 5 years. At that point, with an installed base of more than 1,500 vehicles, the company’s second leg of growth (ie. parts) should start, with both incremental revenues and, more importantly, margin expansion. We believe Grande West offers investors a unique opportunity to participate in an organically growing bus manufacturer with exposure to highly lucrative and stable publicly funded transit bus market. We are initiating coverage of Grande West Transportation Group with a BUY rating and $2.50 Price targets, using a DCF approach and 12% discount rate. January 30, 2017 |Page 3 Ahmad Shaath | 416.507.3964 | [email protected] Grande West Transportation Public Transit In North America Reliance on Tax-payer’s Dollars North American transit agencies rely on public sources of capital for the majority of their capital needs, with fare and other revenue providing minimal support. In the U.S., transit agencies have consistently sourced 95% of their capex needs over the past 10 years from public funds (e.g. U.S. transit agencies sourced rolling stock, stations, equipment etc.), peaking at ~US$19 billion in 2015. 95% of their capex and 62% of This reliance stretches to operating expenses as well as U.S. transit their opex in 2015 from public agencies claimed US$29 billion of public funds to support their operations funds, for a total just shy of US$50 in 2015, covering more than 62% of their opex. Additionally, both capital billion. and operating funding have registered a ~5% CAGR over the last decade, and with current commitments under the Fixing America's Surface Transportation Act (“FAST” Act), this trend is expected to continue. In Canada, the trend has been similar, with capex funding growing at 17% CAGR, albeit Canadian transit agencies