Savaria Corp T.SIS

TD Raise Target

[retiredcf]

Savaria Corp.

(SIS-T) C$15.20

Impressive Execution in a Very Difficult Operating Environment Event

Following Q2/22 results, we have made no changes to our sales/EBITDA estimates through our forecast period, although we did make minor segment adjustments which we chalk up to fine-tuning. However, our lower EPS forecasts reflect higher interest rates in H2/22 and 2023/24.

Rolling out valuation another quarter pushes our target price up $1 to $20.

Impact: NEUTRAL

Yesterday's 7% jump in the shares may have muted some of the expected positive reaction today, but we still believe that the shares remain deeply undervalued given the strong outlook. The Q2/22 results support that view:

 SIS reported another strong quarter of organic revenue growth of almost 10%. Q3/22 appears to be off to a strong start, driven by a solid order backlog, now up even more (i.e., +11% relative to Q1/22.) driven by residential bookings (i.e., record elevator demand) and pent-up commercial demand. Despite the strength, management said that organic growth fell short of internal targets as it felt that more of its record backlog should have been converted into higher sales but was pressured by supply chain and labour inefficiencies at times.

 Savaria has made good progress with its "on-shoring" strategy, with its Mexico sub-assembly plant on track to open in September 2022 and its Brampton factory now able to fully produce the rail for the Freecurve stairlift (eliminating the need to ship the product from one of their European facilities). We expect these initiatives to deliver at least several benefits, including: 1) freight savings; 2) better inventory management (less working capital tied up on cargo ships); 3) improved lead times (i.e., shipping from Mexico to North American facilities will take a week instead of months); and 4) production visibility. All of this should result in significantly more efficient operations longer term and limit future supply chain disruptions highlighted above.

TD Investment Conclusion

Even after yesterday's 7% "risk-on" jump in the share price, Savaria shares are cheap in our view (i.e., trading at 10.2x forward consensus EBITDA, well below its 2-year average of 12.5x) for a company executing this well, is deleveraging, and is expected to generate almost 20% in EBITDA growth over the next three years.