Savaria Corp.
(SIS-T) C$16.28
String of Strong Results Flying Under the Radar Event
Following the Q1/23 conference call, we fine-tuned our model mostly to reflect the Q1 beat, resulting in a modest ~1% increase in 2023/2024 revenue and adj. EBITDA. 2023/2024 EPS estimates decreased by 5%/2% to better reflect amortization run- rate. Rolling out valuation another quarter, our target price increased to $21.00 (up from $20.00). We are also introducing our 2025 revenue/adj. EBITDA estimate of $949mm/$171mm, modestly below SIS's long-term revenue target of $1bln.
Impact: SLIGHTLY POSITIVE
The Q1/23 results support our positive outlook for the balance of 2023. Specifically:
Organic growth off to a strong start, with: 1) record and growing backlog in Accessibility (+8% from Q4/22) driven by strong residential and commercial demand; 2) meaningful cross-selling synergies from the Handicare integration (particularly in commercial sales, given its now broader product offerings); and 3) market share gains. We expect these factors, together with modest pricing in Q2,to drive ~10%/11% organic growth in Accessibility/Patient Care in 2023.
Consolidated adj. EBITDA margin expansion was strong (+170bps excluding one-time professional fees). Looking ahead, we expect: 1) pricing and vendor diversification to offset supply chain inflation; 2) operating efficiencies from higher volume (i.e., clearing the backlog, cross-selling, and market share gains) and consolidated manufacturing with Handicare; 3) moderating supply chain and FX pressures on the cost of goods (i.e., management believed that the biggest supply challenges are now behind it); and 4) "on-shoring" initiatives at its Brampton and Mexico plants, which significantly reduces North America order lead time and should deliver cost savings, more meaningfully longer-term. All in, we forecast a healthy 80bps margin expansion in 2023.
TD Investment Conclusion
The shares are weaker in early trading, and we suspect that it is because they did not raise guidance. Given that it is still early days and the challenging macro backdrop, management's conservatism is not unreasonable. We recommend using the weakness to accumulate shares, which despite a strong run YTD, are still undervalued (i.e., trading at 10.1x forward consensus EBITDA, lower than its two-/ five-year average of 11.2x/11.9x) for a company executing this well, is deleveraging, and is expected to generate ~12% CAGR in EBITDA through 2025.