Savaria Corp T.SIS

TD

[retiredcf]

Savaria Corp.

(SIS-T) C$16.48

Turning the Page: ERP Disruption Over As Quickly as it Started Event

Following the Q2/23 conference call, we fine-tuned our model mostly to reflect the Q2 miss, resulting in an ~1%/3% decrease in 2023 revenue/adj. EBITDA. Our 2024 and 2025 estimates are unchanged reflecting the positive outlook and no lingering impact from the ERP disruption. Our $21.00 target price and BUY recommendation are both unchanged.

Impact: NEUTRAL

We are encouraged by the very modest share price reaction as investors appear to be looking through the ERP noise and to the strength of the operating results outside the European disruption. The good news is that the ERP issue is over, supported by June volumes back up to the level prior to the system change and higher in July. As we mentioned in our flash note to investors earlier this morning, this is an experienced management team particularly around operations, and while ERP system implementations can be tricky, we expected the issues to be fixed quickly. Consequently, our positive views on the second half and longer-term outlook are unchanged, and hinge on:

• Strong organic growth, due to: 1) record and growing backlog in Accessibility 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 to drive ~6%/8% organic growth in Accessibility/Patient Care in 2H/23.

• Consolidated adj. EBITDA margin expansion (110bps in 2H) due to: 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) "on-shoring" initiatives at its Brampton and Mexico plants, which should deliver more meaningful cost savings over time; and 4) potential new savings arising out of the company's new “Savaria One” initiative which focuses on operational and sales excellence.

  TD Investment Conclusion

  Despite a strong run YTD, SIS shares are still undervalued (i.e., trading at 9.9x forward consensus EBITDA, lower than its two-/five-year average of 10.7x/11.7x) for a company executing this well (despite the minor hiccup), is deleveraging, and is expected to generate ~12% CAGR in EBITDA through 2025.