Wajax Corp T.WJX

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Shovel-Ready for 2022

OUR TAKE: Positive. Following the big EPS beat in 1Q22 (+32% vs. Street), we conservatively raised our 2022E EPS by 5%. WJX’s end-markets are working: approximately 50% of its revenues come from mining, forestry, oil sands, and oil & gas end-markets. Western Canadian sales were up strong (~20% organic) and are likely poised for a record 2022. Its Industrial Parts and ERS business are growing at double-digit rates, growth we view as sustainable in the M-T given the strong backdrop and its ability to compound with M&A (Industrial Parts + ERS revenues have CAGR’ed at 13% in the last 5 years).

Wajax reported its highest Q1 EPS, backlog, and lowest leverage in a decade. We expect its shift in the strategy, executed over the last couple of years, to enhance equipment inventory turnover and reallocate capital into Industrial Parts and ERS will also raise its ROIC to the highest levels in a decade in 2022. All of this, to us, points to a company with structurally higher earnings/returns. While its shares were up double-digits today, WJX trades only at 7x P/E on our 2022E and 1.2x P/B, which is relatively close to its trough multiples seen in 2015/16.

KEY POINTS

Wajax followed up an unexpected 4Q21 miss with a significant 1Q22 beat demonstrating how the previous issues were temporary. Sales, EBITDA, and adjusted EPS came in 8%, 13%, and 32% ahead of consensus. Industrial parts and ERS continued to demonstrate strong growth trends. Equipment tightness limited deliveries (sales were essentially flat y/y despite the strong demand backdrop), but the backlog increased to a record $540 million, +27% q/q and nearly doubled y/y (most of which is expected to be delivered in 2022). Equipment margins continued to benefit from the tight supply environment. In addition, mix aided margins as product support sales strengthened on strong oil sands activity. SG&A came in above our estimates as expenses expanded to support higher sales.

In its outlook, the company noted that it continues to see sound fundamentals in many of its key markets underpinned by improving commodity prices and increased capital spending. The company expects supply chain issues to persist throughout 2022, particularly in heavy equipment, namely in construction, forestry, and material handling. Management expressed optimism in the company’s opportunity to leverage its direct relationship with Hitachi to expand its sales and aftermarket sales (with shipments coming in at a “trickle” now, but expected to beef up through 2022, with two large mining shovels to be delivered in the 2H).

We view the valuation as undemanding on an absolute and relative basis, especially given the favorable backdrop and WJX’s direct exposure to oil sands, oil & gas, and mining customers. On a FCF basis, in the last eight quarters, Wajax has generated ~65% (or $13.60/share) of its current market cap in FCF.

• 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	$0.84	$0.70	$0.61	$2.85	6.8x
2023E	$0.61	$0.86	$0.70	$0.61	$2.90	6.7x

Wajax reported 1Q22 sales, adjusted EBITDA, and adjusted EPS of $440 million, $39.3 million, and $0.71, compared with consensus of $407 million, $34.7 million, and $0.54, respectively (see Exhibit 1). The beat was driven by better than expected sales volume and gross margins, offset by higher SG&A expenses.

Sales increased 14% y/y with strong increases across all business lines – rental (+10%), industrial parts (+24%), product support (+16%), ERS (+21%) – except new equipment (-1%) due to supply chain constraints. Tundra contributed three months of sales in 1Q22 versus one month in 1Q21; overall, we estimate organic growth was about 8%. On a regional basis, sales increased 33% in Western Canada and 4% in Eastern, offset by a 6% decline in Central. By end-market, growth in mining (+54% – inclusive of a mining shovel delivery), industrial parts (+24%), power systems (+21%), ERS (+21%), and ERS (+3%) was offset by lower construction and forestry sales (-10%). The company made new hires to boost sales in Ontario, an area where it believes it it most under penetrated based on its market share stats.

Exhibit 1 - A Strong Start to the Year

Source: Company reports; FactSet; Scotiabank GBM estimates.

Adjusted EBITDA margins of 8.9% expanded 150bp y/y on a like-for-like basis (i.e. excluding CEWS). Gross margin expanded 240bp y/y on a like-for-like basis due to higher equipment margins and a higher proportion of (higher margin) industrial parts, ERS, and product support. Management expects gross margin to moderate towards the 20.1% to 20.2% range as the year progresses and as it completes large equipment deliveries (we forecast 20.5%). SG&A rate expanded 50bp y/y on a like-for-like basis. On a dollar basis, SG&A increased to $67.2 million from $57.3 million in 1Q21, on a like-for-like basis, due to higher salary costs in line with the increased sales volume as well as the incremental costs related to Tundra. Going forward, management expects SG&A rate to come in at the 14.5% to 15.5% range.

FCF generation was $9.4 million in 1Q22. The company ended the quarter with net debt to EBITDA (inclusive of leases) of 2.1x (or 1.24x excluding leases).

Exhibit 2 - EPS Near Historical Highs...

Source: Company reports; Scotiabank GBM.

Exhibit 3 - ...and Leverage at Historical Lows

Source: Company reports; Scotiabank GBM.

Exhibit 4 - 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 5 - Financial Forecasts (in C$ millions, unless noted otherwise)