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QUIC RESEARCH REPORT

QUIC Research Reports focus onemerging investment themes thataffect current portfolio companiesand companies under coverage.

New Flyer Industries (“New Flyer” or “NFI”) is the largest transit bus andmotor coach manufacturer and parts distributor in North America withmanufacturing and distribution facilities across Canada and the UnitedStates. Founded in 1930 and focusing on transit since the mid-20th

century, New Flyer recently became the dominant player in the motorcoach industry with its acquisition of Motor Coach Industries (“MCI”) inDecember 2015. Under the leadership of Paul Soubry Jr., namedCanadian CEO of the Year by the Financial Post, New Flyer has seen astrong mix of organic and acquisition growth in recent years.

Theses

(1) Dominant Position in the Transit and Coach Bus Markets

(2) High Earnings Visibility from Reliable Business Model and Backlog

(3) Strong and Improving Fundamentals

Valuation

A target price of $50.00 was reached using a blended valuation basedon both a discounted cash flow analysis and historical multiples,yielding an all-in return of 19.5%.

New Flyer Industries (TSX:NFI)North America’s Leading Bus Manufacturer

February 6th, 2017

Andre LukCameron SuchardaWalid HerzallahConnor Steckly

QUIC Research ReportFebruary 6, 2017

Sub-‐Title

February 6, 2017 2

Sales (US $MM)

New Flyer Industries is a Canadian manufacturer oftransit and motor coach buses headquartered inWinnipeg, Manitoba. The company operates undertwo main segments: Bus Operations andAftermarket Operations, which occupy 79% and21% of revenues, respectively. Geographically, thebusiness operates in the United States and Canada,with respective revenue shares of 90% and 10%. In2015, the company acquired Motor CoachIndustries. Together, the new entity operates 42,000transit (under the names New Flyer, NABI, andOrion) and 22,000 coach .

In its bus segment, New Flyer offers both transitand coach buses, holding the #1 market share ineach. Within the transit space, the company offersboth heavy and medium-duty vehicles for publictransit applications. In the coach bus sub segment,MCI serves both public and private customers, withthe J-Model being the best selling inter-city coachin North America for 11 consecutive years.

In its aftermarket segment, New Flyer offers a wideassortment of parts and prides itself with industry-leading short delivery times. Additionally, value-add

programs such as mid-life upgrades improve theoperating lifecycle of their buses. Operating andmaintenance training is also offered under thissegment in a variety of mediums, such as:classroom, e-learning, and on-the-job.

NFI has a broad parts distribution andmanufacturing center footprint across Canada andthe United States. In Canada, locations are found inEdmonton, Winnipeg, Brampton, and Montreal. Inthe United States, service and parts distributioncenters are primarily in the northeast, with someexposure in other regions across the country suchas the Midwest and California. NFI is committed tooffering environmentally-friendly propulsionmethods. This is demonstrated in the option forclean diesel, natural gas, electric-trolley, hybrid-electric, & battery-electric propulsion within theirproduct portfolio.

NFI has converted the majority of its debentures,which has lowered its leverage ratio from 3.5 in2010 to 2.08 in Q3 2016. The company’sdeleveraging has been assisted by low capexspending and FCF growth.

Geographic Segmentation

Company Overview

865 984 1132 12171681119

215319 322

390

0

500

1,000

1,500

2,000

2,500

2012 2013 2014 2015 2016E

Bus Operations Aftermarket Operations

United States90%

Canada10%

EXHIBIT 2EXHIBIT 1

Source: Company Reports Source: Thomson One Reuters

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HD Transit Bus Market Share

Transit Bus Industry

Transit buses are a crucial component of the publictransit industry as a whole. In fact, buses provide asmany rides on an annual basis as all other means ofpublic transit combined. After significantrestructuring in the bus manufacturing industryover the past two decades, only three prominentplayers remain: Gillig Corporation, New FlyerIndustries, and Nova Bus.

Transit buses come in various sizes and arecategorized on the basis their length and GrossVehicle Weight (GVW). Heavy duty buses, which areclassified as having a GVW greater than 26,000lbs,have a useful life between 10 and 12 years. Mediumand light-duty buses, which are classified asweighing between 4 and 26 thousand lbs., have auseful life between 4 and 7 years.

Within the industry, there are a variety of differentpropulsion methods, with the most popular beingdiesel. However, propulsion methods that areenvironmentally-friendly, notably hybrids and zero-emissions electric,, are gaining traction.

Although the industry has high barriers of entry,two new manufacturers have recently entered theUS market with battery-electric buses: Proterra andBYD America.

Coach Bus Industry

The motorcoach industry is similar to the transit busindustry in application, however, the buses are usedto travel longer distances. Similarly to the transitbus industry, the motorcoach bus industry isdominated by three large manufacturers: MotorCoach Industries, Prevost, and ABC/Van Hool.

The motorcoach industry has benefited significantlyfrom the increase in inter-city bus services fromnetworks offered by Greyhound Express, Megabus,and Boltbus. However, this growth is only present inthe 45+ foot segment; the three majormanufacturers of coach buses have experiencedsubstantial decreases in their sub-45’ motorcoachsales since 2012. NFI recently became the leadingplayer in the motorcoach industry due itsacquisition of MCI in December 2015.

Transit Bus EUs Delivered in Canada/US

Industry Overview

45%

33%

19%3% New Flyer

Industries

Gillig Corporation

Nova Bus

Other0

2,000

4,000

6,000

8,000

10,000

1997 2000 2003 2006 2009 2012 2015

New Flyer Total Industry

EXHIBIT 4EXHIBIT 3

Source: January 2017 Investor Presentation Source: Company Reports

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February 6, 2017

New Flyer has long been a leader in the heavy-dutytransit bus space, controlling over 45% of themarket. However, New Flyer’s December 2015acquisition of Motor Coach Industries gave thecompany a 38% market share in the coach busmarket, broadening its revenue streams to bothpublic and private customers. Approximately 90%of total revenues in 2016 came from the UnitedStates, a welcome sign due to a more positiveeconomic outlook south of the border. Combined,the two companies serve 24 out of the 25 largesttransit operators in the US, protecting againstdownturns in regional expenditure cycles.

New Flyer’s Heavy-Duty Transit Business

New Flyer’s (excluding MCI) customer-base is madeup almost exclusively of government transitagencies across the U.S. and Canada. New Flyer’sreputation and history of reliable, high-qualityproducts has allowed it to develop strongrelationships with transit authorities across Canadaand the United States. These relationships aresupported by the company’s aftermarket segment,as customer are attracted to the reliability of a

manufacturer who can promise a well-maintainedfleet several years after purchase. A typical NewFlyer contract is made up of both an immediateorder to be fulfilled in addition to the option toexercise options at a later date. We believe NewFlyer’s conversion ratio of ~80% on these options(597 exercised vs. 150 cancelled/expired) in 2016 isa testament to the satisfaction of its customers andthe health of these relationships moving forward.

New Flyer’s market-leading position andinvestments in its zero-emission electric Xcelsiorbus (“ZEB”) should allow the company to capturenew contracts as municipal demand for continuesto grow at ~4% per year. Management believesthat investments in new units will be driven bysupport for public-transit funding nationwide inaddition to the need to replace aging fleets withmore green, cost-effective technology. New Flyerreceived orders for 213 ZEBs in 2015, up 48% year-over-year and making up approximately 8% of totalproduction. New Flyer estimates that it currentlycontrols ~83% of the total market for ZEB’s inNorth America with minimal competition.

Customer Date Length Order Value Since

Houston METRO Jan 2017 3Y 239 EU + 30 Op. $120M 2001

BC Transit Jan 2017 1Y 30 EU + 43 Op. - -

AC-Oakland Transit Dec 2016 5Y 112 EU + 120 Op. $50M 2013

San Francisco(Options Exercised) Dec 2016 5Y 236 EU $153M 2014

Washington Metro(Options Exercised) Sep 2016 - 100EU $56M 2002

4

Source: Company Press Releases

Investment Thesis I: Leading Position in Diversified Markets

EXHIBIT 5Recent Contracts

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CEO Paul Soubry describes the MCI-combination asa “match made in heaven”. MCI is North America'sleading motor coach manufacturer and aftermarketsupplier with three manufacturing facilities and nineaftermarket distribution centers. The company’sbase of 28,000 units is nearly double that of itsnearest competitor.

Although many of MCI’s customer are transitagencies which overlap New Flyer’s existingcustomer base, the majority of MCI's business isderived from private customers. The mammoth$500 million New Jersey Transit contract currentlybeing fulfilled by New Flyer is a testament to thequality of MCI’s customer base. Although a fundingsuspension in New Jersey and a subsequentdelivery freeze made headlines in Q3 2016, thecontract was sustained and delivery is ahead ofschedule for 2017.

Despite these overlaps, MCI’s coach bus businessoperates differently than companies in New Flyer’s

native industry. Rather than operating under multi-year contracts, selling is much simpler; privatecustomers usually purchase with a single order,financed by their cash flows or debt. In addition, theresidual value of coach buses is a significant factor,as many customers “trade-in” older units whenpurchasing new fleets. Approximately 60% of salesin the business involve a trade-in, as operatorsreplace their fleets every 5 - 10 years to remaincompetitive. MCI’s second-hand inventory isprocured exclusively from these trade-ins.

Due to these differences, New Flyer’s integration ofMCI has not been as seamless as previousacquisitions. Management has targeted ~$10million in cost synergies, primarily from generalcorporate costs, of which ~$7 million has beenrealized. The integration continues to be assisted byexpertise from Brazilian coach-giant MarcopoloS.A., which owns a 20% stake in New Flyer. Overall,the MCI acquisition not only broadens thecompany’s customer-base and revenue streams,but also hedges against the risks associated withpublic funding,.

5

Map of NFI (Orange) & MCI (Blue) Facilities

Source: July 2016 Investor Presentation

MCI Acquisition

Coach Bus Market Share

MCI44%

PREVOST33%

VANHOOL13%

TEMSA10%

Source: January 2017 Investor Presentation

Investment Thesis I: Leading Position in Diversified Markets

EXHIBIT 7EXHIBIT 6

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February 6, 2017

9%

15%

19%

20%

37%2017

2018

2019

2020

2021

New Flyer’s delivery model and growing backloghave translated into high earnings visibility forinvestors over the past few years. Each year, thecompany’s delivery schedule is announced for thecoming 12 months based on the active biduniverse, defined as the combination of (i) EUs inactive competitions (“requests for proposals”) and(ii) management’s forecast of EUs expected to bedelivered over the next five years.

The long anticipated increase in the company’sproduction line, now forecasted at 3,650EUs for2017 (up from 3,450 in 2016), finally came in Q4after a long period of speculation. Management hasstated that changes in its production rate onlyoccur when the company has confidence in thesustainability of the new rate for coming years. In itsmost recent earnings call, New Flyer CEO PaulSoubry commented that “[New Flyer’s] deliveryschedule on the public side is better than it’s everbeen.” Public sector demand is expected to bedriven by expected customer fleet replacementplans for aging , growing support for public transit,and improving economic conditions.

Furthermore, New Flyer’s total backlog currentlystands at 10,187EU (valued at $5.23 billion)compared to 9,808EUs at the end of 2015. Theincrease in backlog can be attributed to thecompany’s healthy Book-To-Bill ratio of 131% overthe last twelve months, measured as new ordersdivided by completed deliveries (~153% in Q4alone). A ratio of 100%+ indicates increasingdemand, as the company is procuring newcontracts at a faster rate than deliveries exiting thefunnel. The company’s Book-To-Bill ratio hasexceeded 100% for 15 of the last 16 quarters. Thequality of this backlog is equally impressive, with42% of EUs being made up of clean propulsionsystems and another ~5% attributable to ZEBs.

Over 50% of this backlog is not expected to expireuntil after 2020, giving investors a high degree ofvisibility in the years to come. Historically, thecompany has succeeded at converting theseoptions into orders before expiry. New Flyer’scustomers converted 597 EUs worth of options in2016; only 150EUs of options expired during thesame period.

6

Investment Thesis II: High Earnings Visibility

Option Expiry of Backlog (6,988 EUs)

Source: Company Reports

135%

30%

60%

90%

120%

150%

180%

3Q14 1Q15 3Q15 1Q16 3Q16

LTM Book-To-Bill Ratio

Source: Company Reports

EXHIBIT 9EXHIBIT 8

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970

601

1,149 1,339

2,064

736 1,094 965

504 550

30%

50%

70%

90%

0

500

1,000

1,500

2,000

2,500

2012 2013 2014 2015 2016

Options Excercised Options Expired Conversion Ratio

7

Options Converted vs. Options Expired (EUs)

Source: Company Reports

EXHIBIT 10

Investment Thesis III: Strong and Improving Fundamentals

Investment Thesis II: High Earnings Visibility

7

Source: Company Reports

New Flyer’s business fundamentals, especially itsmargins and free cash flow, have steadily grown forthe past five years and have shown steady, yetsignificant improvement. In the last 12 months,both adjusted EBITDA margins and free cash flowhave dramatically increased, as seen in the graphsbelow. With continued demand for its top-of-the-line products, along with potential lower U.S. taxesand cost consolidations with the MCI acquisition,both margins and free cash flow are expected toincrease. Potential harmonization of MCI’s twomanufacturing platforms and aftermarket productmargin expansion will allow New Flyer’s profitabilityto grow, yet remain sustainable.

Furthermore, the firm’s increasing free cash flowhas increased the likelihood of a significantdividend increase (~15%) or M&A activity. Althoughan acquisition the size of MCI is unlikely,management has expressed that smalleracquisitions (similar to NABI) are a possibilityamidst sluggish growth in the aftermarket segment.

$41$64 $57

$90

$181

$20

$31 $50

$61

$76

7.05%7.92%

7.37%

9.81%

12.41%

0%

5%

10%

15%

$0

$100

$200

$300

2012 2013 2014 2015 LTM

Aftermarket Bus Adjusted EBITDA Margin

EXHIBIT 11Adjusted EBITDA ($M)

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Free Cash Flow and Dividends ($MM)

Source: Company Reports

EXHIBIT 12

Catalysts

Investment Thesis III: Strong and Improving Fundamentals

8

Source: AltaCorp Capital

1) Trump Tax Reform: A decrease in thecorporate tax rate would have hugeimplications for New Flyer’s profitability.Subject to the Buy America Act, the companyalready operates under a protectionistenvironment and does not see significant risksunder the Trump presidency.

2) Increases in Public Sector Spending: Themajority of NFI’s customers are publicly-fundedmunicipal transit agencies. Increased spendingin any region could positively impact the firm,especially in New York, where the firm iscurrently bidding on a new round of contracts.The company’s recent opening of a New Yorkfacility has positioned the firm well to capitalizeon growth in the region.

3) Going Electric: While NFI’s hybrid have longbeen popular with its customers, there is plentyof room for growth in the electric space. Agreen focus will drive NFI’s ZEB sales, whichmade up only 8% of production in 2016.

$27 $45 $66$108

$219

$33 $31 $33 $34

$48

$0

$20

$40

$60

$0

$50

$100

$150

$200

$250

2012 2013 2014 2015 LTM

Free Cash Flow DividendsSource: Company Reports

EXHIBIT 13

CorporateTax Rate

EffectiveTax Rate

2018EEPS

TargetPrice

15.0% 16.1% $3.37 $62.05

20.0% 20.6% $3.18 $60.56

25.0% 25.2% $3.00 $59.08

30.0% 29.7% $2.82 $57.59

U.S. Corporate Tax Rate Sensitivity

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Valuation: Discounted Cash Flow Analysis

Risks

9

1) Change in Raw Material Costs: New Flyer’soperations and profitability are dependent onthe cost of its raw materials and components.Any changes would have a significant impacton the firm’s profitability – price increases aremore likely to occur and would present severeissues for all of New Flyer’s products.

2) Competition in Electric Bus Space: NewFlyer’s industry-leading electric Xcelsior areexpected to be a key driver of growth in theyears to come. Although the company currentlycontrols 83% of the market, new playersProterra and BYD America could pose a threatto the company’s dominance in the zero-emissions bus space.

3) Foreign Currency: Although New Flyer reportsin CAD, the majority of their revenue and costsare derived from the United States. Therefore,any change in CAD/USD exchange rate wouldhave large implications on the firm – whetherthat be positive or negative.

DCF Output(In CAD 000s) 2015A 2016E 2017E 2018E 2019E 2020E 2021ERevenue 2,009 2,975 3,100 3,193 3,282 3,364 3,449

YoY Growth 6.5% 48.1% 4.2% 3.0% 2.8% 2.5% 2.5%

EBITDA 213 296 341 370 393 413 431% of Revenue 10.6% 10.0% 11.0% 11.6% 12.0% 12.3% 12.5%

EBIT 154 208 249 275 296 314 328Less: Tax Expense 28 39 46 51 55 58 61NOPAT 125 169 202 224 241 255 267

Plus: Depreciation and Amortization 59 88 92 95 97 100 102Less: Capital Expenditure (11) (19) (20) (21) (21) (22) (22)Less: Change in Working Capital (245) 105 (10) (7) (7) (6) (7)

Unlevered Free Cash Flow (72) 344 264 291 310 327 340Unlevered Free Cash Flow for Discounting 86 264 291 310 327 340Discount Period 0.25 1.25 2.25 3.25 4.25 5.25

Discounted Unlevered Free Cash Flow 246 256 258 258 254

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Valuation: Historical Multiples

Valuation: WACC & Share Price Calculation

10

19.1x

22.7x

9.8x

10.5x

0x

5x

10x

15x

20x

25x

30x

Feb-15 Jun-15 Nov-15 Mar-16 Aug-16 Jan-17P/LTM EPS Historical Mean EV/LTM EBITDA

WACC CalculationRisk-Free Rate 2.48%Market Risk Premium 6.25%Beta 0.72Cost of Equity 6.98%

Cost of Debt 2.25%Tax Rate 18.65%After Tax Rate Cost of Debt 1.83%

Capital StructureEquity 76.00%Debt 24.00%Total 100.00%

WACC 5.74%

Share Price Calculation2022 EBITDA 441EV/NTM EBITDA Exit Multiple 9.5xTerminal Value 4,190

PV of Terminal Value 3,127PV of UFCF 1,273Enterprise Value 4,400Less: Total Debt 759

Implied Equity Value 3,641Shares Outstanding 62Implied Share Price $58.92

Current Share Price $42.65Dividend Yield 2.30%All-in Return 40.44%

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Portfolio Fit

Valuation: Football Field & Target Price

11

$35

$45

$55

$65

Analyst Estimates

Historical P/NTM EPS

Historical EV/NTM EBITDA

DCF

Target PriceHistorical P/E LTM 48.60$ Historical EV/EBITDA 44.73$ DCF 58.92$ Target Price 50.00$ Current Price 42.65$

Capital Return 17.23%Dividend Yield 2.27%All-in Return 19.50%

Current

Target

Canadian National Railway Company

42%

K-Bro Linen Inc.25%

Stella-Jones Inc16%

New Flyer Industries17%

Although New Flyer is an industry leader with strong fundamentals and room for growth, the Industrialsteam is cautious of its current price. Over the past year, New Flyer’s share price has soared over 56% andgiven its limited organic growth opportunities, we feel that further monitoring of the name is needed.Despite its current valuation, we are very confident in the company and believe that its market leadingposition in various sectors, high earnings visibility, and improving fundamentals make it a highly attractivename. We will continue to follow New Flyer’s progress and its integration of MCI. If a buy recommendationis decided upon, we expect to purchase approximately 240 shares of the stock, representing 17% of ourCanadian portfolio, ultimately increasing holdings in the Heavy Equipment & Manufacturing space.

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1. NFI Company Reports

2. NFI Investor Presentations

3. Capital IQ

4. Bloomberg

5. Scotiabank

6. BMO Capital Markets

7. CIBC

8. AltaCorp Capital

9. Financial Post

10. Mineta Transportation Institute

11. American Bus Association

References