The Facts (as of October 6, 2010)

Unit price: $15.40. Book value per unit: $6.71. Market cap: $166 million (small). Distribution: $0.105 per month or $1.26 per year. Yield: 8.2%. P/E: 9.8x. Debt/equity ratio: 0.45. Payout ratio: 80%.

The Story

Badger Daylighting’s mobile hydrovac excavation systems offer many advantages compared to traditional hydraulic powered trenching and excavation machines. Our excavator systems use water and vacuum technology to quickly and cleanly blast through dirt and rocks to expose pipeline, utility and electrical systems or to open the ground for future work. Digging trenches using general excavation techniques also poses potential safety hazards when excavating around buried gas lines and hydro utilities. The Badger Hydrovac provides a safe and non-destructive alternative to conventional backhoes or other mechanical means.

In 2008, the unit price peaked over $23.00, while the distribution increased from $0.07 per month in 2005 to $0.105, remaining consistent during the recent recession. The unit priceĀ  fell to $13.00 during the worst of the crash, recovering to over $15.00. This stock has not fully participated in the market recovery and still has room for growth. The company has already announced their plan to convert to a corporation at year end. At their current payout ratio of 80%, it is reasonable to assume that the distribution may be cut by 10% or more when they become taxable. It seems reasonable to expect a dividend yield of 5%-7%.

Pros

This stock looks relatively cheap by all measurements and appears to have ample room for appreciation. The yield is attractive and the outlook is fairly stable. This is a relatively small company headquartered in Calgary, with operations in utility maintenance with some operations geared toward oil & gas production. In the coming years, whether there is a focus on infrastructure build-out or on oil & gas development, this company stands to benefit. Management is considered to be conservative and is highly regarded by professional investors.

Cons

Trading volume is thin and the price is volatile throughout the day. Earnings are down from last year, but not significantly. There is uncertainty surrounding government and private spending on infrastructure, even though many people seem to expect it to be a strong theme in future.

Impression

The yield is reasonably good, and I especially like the relatively low payout ratio and debt-to-equity. This company seems to be relatively stable and, at these prices, offer an attractive investment. Even if the distribution is cut, giving the company more capital to expand operations, it will likely offer an attractive dividend, probably with an expectation of some capital growth.

Badger Income Fund BAD.UN