Wajax Corp T.WJX

New Scotia Report Very Encouraging

[savyinvestor333]

Wajax Corporation

• WJX-T: C$21.37
• Target: C$29.00
• Rating: Sector Outperform

Building Bigger and Better

OUR TAKE: Positive. We hosted Wajax’s (new) President & CEO, Iggy Domagalski, and CFO, Stuart Auld, for virtual marketing meetings on Monday. Wajax is performing much better this cycle versus the last. While the commodity backdrop is helping, a lot of the outperformance is due to structural improvements over the last couple of years: it rightsized its inventories, generated significant FCFPS ($12.50 in 2020/21), reduced leverage, and reinvested acquisition capital into Industrial Parts/ERS. As a platform, we could argue that its Industrial Parts/ERS business should be worth ~10x EV/EBITDA (i.e., it is a high-return distribution business) – and we do not think investors have properly ascribed value to this growing segment just yet. And, despite Wajax being on pace to generate a pre-tax ROIC of ~18% (comparable to FTT), WJX’s trading multiple lags its peers and historicals at 1.1x P/B and 7.5x P/E on our 2022E.

Going forward, we think its Industrial Parts/ERS growth story will be a differentiator versus FTT/TIH. Importantly, WJX now comfortably out-earns its dividend and has the B/S to reinvest and compound earnings. And, from a valuation standpoint, using a SOTP calculation, we could argue WJX is worth almost 2x its market cap.

KEY POINTS

Sustainable earnings drivers. Management is most bullish on the company’s growth prospects in (i) Industrial Parts/ERS and (ii) its new direct relationship with Hitachi. Wajax defines the Industrial Parts/ERS industry as a $10 billion market. With its Canada-wide physical footprint, Wajax is one of the largest players and a natural consolidator in the space (closest comps in the U.S. are AIT [AIT-US] and DXP [DXP-US], neither of which are covered). Generally, Wajax aims to CAGR revenue by >10% in this segment – i.e., GDP-plus organic and supplemented with M&A. The company has an active pipeline of tuck-ins and well-developed corporate development/integration capabilities. We estimate the company can comfortably deploy >$100 million of capital (deals go for ~5x EV/EBITDA). As for Hitachi, the dissolution of the JV between Hitachi Construction Machinery Americas Inc. (HCMA) and John Deere (DE-US) on March 1, 2022 significantly favors Wajax. The company now has a direct partner that wants it to “win” – we think the direct partnership will translate into easier sourcing of OE and parts (which should drive market share) and, longer-term, a more differentiated product and technology offering.

Built better. We believe WJX’s strategic shift, whereby it reallocated excess capital into Industrial Parts/ERS, has structurally enhanced its earnings profile. For example, on a similar base of inventories, WJX is set to expand revenues and EBITDA by >20% in 2022E versus 2018/19. Going forward, we believe the focus will be on selective growth/cash flow harvesting at its equipment distribution business, while reinvesting and rolling-up in its Industrial Parts/ERS. And, with mid-cycle EPS of >$2.00, it can comfortably reinvest for M&A.

• Quarterly Financials
• Yearly Financials

Historical price multiple calculations use FYE prices. All values in C$ unless otherwise indicated.
Source: FactSet; company reports; Scotiabank GBM estimates.

Qtly Adj EPS  (FD)	Q1	Q2	Q3	Q4	Year	Price/Adj. EPS
2020A	$0.29	$0.47	$0.50	$0.48	$1.75	9.8x
2021A	$0.57	$0.75	$0.70	$0.32	$2.33	10.4x
2022E	$0.71A	$0.80	$0.70	$0.64	$2.85	7.5x
2023E	$0.61	$0.86	$0.70	$0.61	$2.90	7.4x

Exhibit 1 - Accelerated Industrial Parts/ERS Growth

Source: Company reports; Scotiabank GBM estimates.

Exhibit 2 - Earning Higher and More Consistent Margins

Source: Company reports; Scotiabank GBM estimates.

Exhibit 3 - Achieving Solid Earnings Growth...

Source: Company reports; Scotiabank GBM estimates.

Exhibit 4 - ...and Pumping Out FCF

Source: Company reports; Scotiabank GBM estimates.

Exhibit 5 - Recent Deleveraging Provides Room for M&A

Source: Company reports; Scotiabank GBM estimates.

Exhibit 6 - Doing More...w/ Less

Source: Company reports; Scotiabank GBM estimates.

Exhibit 7 - Trading at Discount to Peer Group

Source: Company reports; FactSet; Scotiabank GBM estimates for Finning International Inc., Toromont Industries Inc., and Wajax Corporation. For companies with FYE other than Dec. 31, we have included their results in the nearest calendar year.

Exhibit 8 - Industrial Parts/ERS Segment Undervalued

Source: Company reports; Scotiabank GBM estimates.

Exhibit 9 - Trading Near Lows

Source: Company reports; FactSet; Scotiabank GBM estimates.

Exhibit 10 - Financial Forecasts (in C$ million, unless noted otherwise)

Source: Company reports; Scotiabank GBM estimates.

Company Overview

Company Description

Wajax Corporation (Wajax) is a multiline distributor of mobile equipment, engines, transmissions, power generators, and industrial components. Wajax has a combined network of more than 106 branches across Canada with a customer base that operates in the natural resources, construction, manufacturing, transportation, and utility end-markets. The company's main supplier is Hitachi, which we estimate represents more than 25% of total sales. Other key brands include Bell, JCB, Yale, Tigercat, and Hyster.

 

Key Risks