Wajax Corp T.WJX

Scotia Upgrade to Outperform Target $29.00

[savyinvestor333]

Wajax Corporation

• WJX-T: C$25.07
• Target: C$29.00
  Old: C$27.00
• Rating: Sector Outperform

Dividend Increase Underlines Structural Growth

OUR TAKE: Positive. We raised our estimates following the 4Q beat. The outlook for infrastructure, non-res, energy, and mining in Canada remains favourable. For the heavy equipment business, price hikes and anticipated volumes growth support continued sales growth in 2023. And, for IP and ERS, we expect HDD% organic growth in 2022 to trend towards HSD% organic growth into 2023. That said, a more balanced supply/demand outlook for heavy equipment should moderate margin leverage. Altogether, with our 2023E/24E EPS forecast of >$3/share, aided by the growth and durability of IP and ERS, WJX appears poised to comfortably out-earn its dividend (50% dividend payout) as well as deploy excess capital to grow IP and ERS via M&A.

WJX trades at 8.3x P/E (and 4.9x EV/EBITDA) on our 2023E, reflecting a discount to its historicals and peers. While the discount versus historicals can be partially explained by macro concerns, we believe WJX’s direct Hitachi agreement (and related opportunities going forward) and its strong performance in IP and ERS (40% of sales; peers trade at >10x EV/EBITDA) support multiple expansion opportunity in the shares. We have increased our target price to $29 from $27.

KEY POINTS

4Q22 sales, EBITDA, and EPS of were 11%, 5%, and 13% ahead of consensus. Equipment sales increased 69% y/y, driven by the delivery of several shovels as well as strength in construction & forestry. Product support increased 15% on the back a strong backdrop. IP and ERS grew 27% and 17%, continuing their strong growth organic trend.

In its outlook, the company highlighted that its backlog (+11% y/y) supports confidence in the near term, with expected growth in the heavy equipment business and strong demand in IP and ERS. We forecast revenue growth of 6% in 2023 – a relatively conservative assumption, in our view, as we expect MSD% to HSD% growth from price in addition to volume growth. For the heavy equipment business, announced price hikes (by Hitachi; HSD% in April) and anticipated volumes growth (skewed towards the 1H) support continued sales growth in 2023. For IP and ERS, we forecast HSD% organic growth in 2023 (AIT-US is guiding to HSD% growth in 1H23). SG&A as a % of sales declined to 14.1% in 2022 (from 14.6% in 2021); we forecast further efficiencies in 2023 (13.9%).

WJX raised its dividend by 32% to $1.32/share per year. Management indicated that the sizable increase in the dividend highlights their increased confidence in the business in the near and long term. With net debt to EBITDA at 1.1x (excluding leases), well below the company’s targeted range, we believe the company has sufficient capacity to fund its acquisition strategy – which we expect to be value accretive.