Wajax Corp T.WJX

Scotia Report and New Target $34.00

[savyinvestor333]

Wajax Corporation

• WJX-T: C$28.25
• Target: C$34.00
  Old: C$30.00
• Rating: Sector Outperform

Driving Forward

OUR TAKE: Positive. WJX exhibited strong operating momentum (and cost discipline) in 2Q. Compared with last year, revenues increased 15%, gross margins were largely unchanged, and its operating leverage ramped, such that EBITDA grew 27%. When compared with consensus, EBITDA beat by 18% (3% from higher revenues; 15% from higher margins). Its three areas of potential outsized growth worked in 2Q: (i) strong organic growth in IP/ERS is being complemented by M&A (with the acquisition of Polyphase in 3Q), (ii) Hitachi sales/market share is ramping, and (iii) the Central Canada ‘turnaround’ produced stronger results.

The equipment cycle remains favorable (i.e. primarily in construction, mining, and energy) – and we think this will continue to provide momentum through the 2H23. WJX’s 2Q EPS growth of 33% exceeded that of its equipment peers (by +10%) – it also delivered the largest beat, partly because expectations remain low. Given the favorable EPS trend in the N-T and L-T, and importantly what we view as its more durable earnings profile vs. previous cycle (due to its direct agreement with Hitachi and expanded IP/ERS business), we think WJX’s trading multiple (7.7x P/E on our 2023E) remains undemanding. We see continued upside.

KEY POINTS

2Q EBITDA/EPS of $57.2 million/$1.22 was 18%/34% ahead of consensus. 2Q sales growth was skewed to Industrial Parts (+16%) and ERS (+21%). 2Q SG&A moderated from 1Q levels, driving strong operating leverage; management expressed confidence in maintaining an SG&A rate below its target of 14.5% to 15.5%. Outside the tougher comp in 4Q (due to three shovels being sold in 4Q22), we expect continued sales momentum in the 2H23 and are encouraged by the company’s growth in its (higher-margin) IP/ERS and product support businesses; we forecast IP/ERS revenue growth of mid-/high-teens in the 2H23. In July, WJX acquired Polyphase Engineered Controls (+2.5% revenue accretive to its IP/ERS).

Central Canada sales increased 23% due to higher equipment sales and strength in IP/ERS. The region’s growth was faster than that of Western (+19%) and Eastern (+6%) Canada. Following the change in leadership, Central Canadian sales have begun to accelerate. In the context of its undersized market share in the region, we believe better execution provides it with a multi-year opportunity for outsized growth, both in Equipment and IP/ERS.

WJX’s three areas of potential outsized growth – (i) IP/ERS roll-up, (ii) expanding share with Hitachi, and (iii) turning around Central Canada – appear to be gathering/maintaining positive momentum. In 2Q, we were particularly encouraged by the increase in product support (+15%). We believe WJX has significant room to expand its product support penetration as it expands its labour capacity and better captures the parts opportunity with Hitachi.

• 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
2021A	$0.57	$0.75	$0.70	$0.32	$2.33	10.4x
2022A	$0.71	$0.89	$0.75	$0.80	$3.15	6.3x
2023E	$0.80A	$1.22A	$0.86	$0.79	$3.68	7.7x
2024E	$0.90	$1.08	$0.88	$0.85	$3.70	7.6x

Sales/adj. EBITDA/adj. EPS of $586 million/$57.2 million/$1.22 came in well ahead of consensus of $567 million/$48.3 million/$0.91. Sales grew 15%, with outsized growth in industrial parts and ERS sales in all regions and higher equipment sales in Western and Central Canada. Product support growth accelerated as some of the company’s initiatives to improve its labour capacity showed results.

• Gross margins of 19.9% moderated 20bps y/y due to lower product support and industrial parts margins, partially offset by higher equipment and ERS margins and a higher proportion of ERS sales. The company’s SG&A rate declined to 12.2% from 13.4%. Given the increased focus on cost efficiencies and expanding revenue base, management believes the company will be able to maintain an SG&A rate below its target of 14.5% to 15.5%. Adj. EBITDA margin increased by 100bp y/y to 9.8%, driven primarily by better than expected operating leverage.

By geography: Western Canada sales increased 19% driven by strong mining equipment sales (including the delivery of a large mining shovel), higher ERS and industrial part sales and higher product support revenue in all categories. Eastern Canada sales increased 6% due to strength in industrial parts and ERS, offset partially by lower equipment sales in power systems. Central Canada sales increased 23% due to higher equipment sales in material handling and construction and forestry as well as strength in industrial parts and ERS.

Exhibit 1 - A Solid Beat

Source: Company reports; FactSet; Scotiabank GBM estimates.

By segment: Equipment sales increased 11% due primarily to strong mining sales in Western Canada (including the delivery of a large mining shovel) and higher material handling and construction and forestry revenue in Central Canada, offset partially by lower power system sales in Eastern Canada. Management expects to sell one mining shovel in 3Q23 and another in 4Q23. That compares to last year, when the company sold one shovel in 3Q22 and three shovels in 4Q22 (i.e. we expect the higher mining shovels sales in 4Q22 to represent a $35 million to $40 million headwind to sales in 4Q23). Product support sales increased 15% due primarily to higher mining and construction and forestry revenue in Western Canada and higher power systems revenue in all regions. Industrial parts sales increased 16% and ERS sales increased 22%.

Backlog increased to $551.2 million (up 3.9% q/q) primarily due to higher material handling and ERS orders, offset partially by lower construction and forestry orders.

Net debt to EBITDA (ex. leases) increased to 1.76x (from 1.74x in 1Q23) due to an increased in working capital of $55.4 million (i.e. primarily inventory). WJX increased its inventories as inventories were particularly low in 2022 (due to the change in the Hitachi relationship) and as it expects higher sales in the 2H23. Given the increase in inventories, we expect FCF to be only modestly positive in 2023. In July, WJX acquired Polyphase Engineered Controls for $17.8 million, plus a three-year performance-based earnout. Polyphase LTM revenues are $26.0 million.

 

Exhibit 2 - Peer Group

Source: Company reports; FactSet; Scotiabank GBM estimates for FTT, TIH, and WJX.

Exhibit 3 - Financial Forecasts (in CAD million, unless noted otherwise)

Source: Company reports; Scotiabank GBM estimates.

Company Overview

Company Description

Wajax Corp. (Wajax) is a multiline distributor of mobile equipment, engines, transmissions, power generators, and industrial components. Wajax has a combined network of more than 118 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.