Savaria Corp T.SIS

TD 2

[retiredcf]

Savaria Corp.

(SIS-T) C$13.03

Shares are Deeply Undervalued Event

Following Q1/22 results, we have increased our 2023 sales/EBITDA estimates by ~3%/4%, reflecting our higher organic growth expectations and margin opportunities stemming from the new Mexico sub-assembly plant. Our 2022 EPS estimate has declined by ~3% due to higher interest-rate forecasts. We have also lowered our target valuation multiple range to 10x-11x (from 12x-13x), given the ongoing macro pressure, lower earnings visibility, and what investors appear willing to pay now, at least temporarily. Consequently, we have lowered our 12-month target price to $19.00 (from $22.00).

Impact: MIXED

Although macro forces still dominate, we remain positive on the shares and outlook:

• SIS reported its strongest organic revenue growth (i.e., 12%) since Q1/19. Revenues would have been higher without the Omicron impact, which resulted in ~7% of available production hours lost in the quarter. Q2/22 appears to be off to a strong start, driven by strong residential bookings (i.e., up 3.0x versus last year, with record elevator demand) and pent-up commercial demand.

• Difficult inflationary environment, but not getting worse. Some data (i.e. Baltic Dry Index) tentatively suggest that shipping costs, although elevated, have peaked. Management confirmed that it is seeing lower container costs, albeit still elevated. We expect initiatives like pricing, improved plant efficiencies (through increased volumes and sharing of best practices), and increased on-shore North American manufacturing to help ease the inflationary pressure this year.

• We would argue that the most important highlight is around the planned initiative to "on-shore" sub-assembly in Mexico for North America, beginning in September 2022. We expect several benefits, including: 1) freight savings; 2) better inventory management; 3) improved lead times; and 4) production visibility. All of this should result in significantly more efficient operations in the long term and limit future supply-chain disruptions.

  TD Investment Conclusion

  Savaria's shares are trading at trough levels, close to 9.0x consensus forward EBITDA. We believe this places valuation firmly in the undervalued territory (i.e., valuation never stays this low for very long) and represents deep value that we expect to be unlocked once the clouds around the overall macro environment begin to dissipate