Wajax Corp T.WJX

From Scotia this Morning

[savyinvestor333]

1Q Beat Continues to Raise the Bar

OUR TAKE: Positive. 1Q EBITDA/EPS beat consensus by 5%/12%. Sales growth of 17% was skewed towards Industrial Parts (+19%) and ERS (+42%), its less cyclical businesses. Sales growth in Equipment (+13%) and Product Support (+8%) were more modest, but the company’s backlog grew sequentially, with incremental strength in mining, material handling, ERS, and construction.

We believe the 1Q beat and trends will lead to an upward revision to consensus EPS, which, to us, appears low at ~$3.05 in 2023E/24E. LTM EPS is tracking at ~$3.25/share, with growth in IP and ERS providing a more durable earnings outlook into the 2H23 and 2024. For its equipment business, we believe the share gain opportunity (driven by new Hitachi agreement) will provide further opportunities for growth, despite moderating cyclical tailwinds. WJX trades at 7.4x P/E (LTM), below its historical average of 10.0x. We will update our forecasts following the investor call tomorrow at 2:00 p.m. EST.

KEY POINTS

Sales, adj. EBITDA, and adj. EPS came in at $516 million, $43.0 million (8.3% margin), and $0.80 versus consensus of $483 million, $40.8 million (8.4% margin), and $0.71. The results were largely solid across the board, except for lower-than-expected product support growth, which we assume also limited gross margin expansion as well as operating leverage; EBITDA growth was 9.5% on revenue growth of 17.4%. Backlog rose to $531 million (up13% q/q) and its net debt to EBITDA (ex. leases) increased to 1.7x (from 1.1x in 4Q22) due primarily to higher inventories.

• By region, sales increased in Eastern Canada (+22%) due to strength in Industrial Parts and ERS, and higher equipment sales in construction and forestry, and material handling. In Western Canada, sales increased (+15%) due to the same drivers, partially offset by lower mining equipment sales. In Central, sales increased (+14%) due to strength in industrial parts sales and higher material handling equipment sales.
• Gross margins were 90 bps lower y/y due to lower product support margins and a higher proportion of equipment sales. SG&A rate of 14.9% decreased 40bps y/y due to increased revenues.
• Adjusted EBITDA margin decreased by 60 bps y/y to 8.3%.

In its outlook for 2023, management noted that it continues to see solid fundamentals in many of its end markets, particularly mining, energy and construction, supported by relatively elevated key commodity prices and sustained budgeting for capital projects.