Savaria Corp.
(SIS-T) C$13.29
Still Expecting 22% EBITDA Growth Despite Trimming Margin Event
Savaria reports Q3/22 results on Nov. 2. We trimmed our margin assumptions as we believe that were a touch aggressive given persistent inflation, transportation costs, lingering supply chain challenges, and the lag from pricing pass-through. Our Q3/22 and 2022 EBITDA estimates fall by 8% and 3%, respectively.
Our new Q3/22 EBITDA estimate of $32.0mm (down from $34.0mm) is slightly below consensus of $32.2mm (which declined from $33.1mm over the past few days).
Impact: MIXED
Our estimate changes reflect a more conservative stance on margin improvement through the end of the year, in light of industry-wide operational challenges. Nonetheless, we are still expecting strong earnings growth in Q3 and through our forecast horizon. Specifically:
Healthy organic revenue growth (10%). We forecasting 9%/15% for accessibility/patient care given record residential backlog, pent-up commercial demand as pandemic-era restrictions have been lifted, pricing, and initial cross- selling benefits stemming from Handicare.
EBITDA growth (up 22% y/y) driven by the strong top line, 160bps margin improvement from pricing, and Handicare synergies (including initial benefits tied to domestic stairlift manufacturing)
On the margin side, while inflation has slowed, we do expect continued challenges around supply chain and labour inefficiencies. Meanwhile, we expect some additional foreign exchange pressure on the cost of goods given the stronger USD (+6% in Q3). Longer term, we believe that Savaria's "on- shoring" initiatives should help mitigate the ongoing supply chain inflationary pressures, and more meaningfully in 2023. Specifically, Savaria's Mexico sub- assembly plant is now operational (and ramping up), meanwhile its Brampton factory is now able to fully produce the rail for the Freecurve stairlift domestically.
TD Investment Conclusion
Savaria shares are trading at ~9.0x forward consensus EBITDA, well below its 2-year average of 12.1x. We believe the shares are undervalued for a company executing this well, is deleveraging, and is expected to generate an almost 20% CAGR in EBITDA over the next three years.