Wajax Corp

Wajax Corp (TSX: WJX) is a Canada-based distributor engaged in the sale and service support of mobile equipment, power systems and industrial components.

Revenue Mix

Source: Kalkine Group, Annual Report

Investment Rationale

• Hovering in a Bullish Zone: At the closing, WJX shares traded well above the crucial long-term as well as short-term support levels of 200-day, 100-day, 50-day and 30-day SMAs, which shows a bullish trend in the stock. Also, moving averages are inching higher, which is another bullish trend.
• Bullish Momentum: The Moving Average Convergence Divergence (MACD), the leading momentum indicator is rising and on October 06 trading session MACD cross over 9-day moving average signal line, which is a bullish indicator. Further, the difference between 12-day and 26-day EMAs is positive, another bullish indicator.
• Better than Industry Average ROE: At the end of the June quarter, WJX RoE stood at 3.2%, whereas the industry median stood at 2.7%.
• Offering a lucrative dividend Yield: At the last traded price of CAD 12.68 (on October 07, 2020), the stock was offering a lucrative divide yield of 7.89%, which is significantly higher given the lower interest rate scenario.
• Interest Coverage Ratio above 3x: Wajax Debt/Equity ratio at the end of June quarter stood at 133.4%, which is relatively higher. However, the interest coverage ratio of 3.4x implies negligible balance sheet risk as the company has enough operating income to cover its debt obligations.

Q2FY20: Financial Highlights

• Second quarter revenue declined by 12.8% to CAD 356.9 million against CAD 409.4 million in the second quarter of 2019.
• Revenue from western Canada stood at CAD 130.9 million, decreased 17.3% over the prior year due primarily to lower product support revenue in most categories, lower equipment sales in the forestry and engines and transmissions categories, and lower industrial parts sales. These decreases were partially offset by higher mining equipment revenue in the quarter.
• Revenue from central Canada came in at CAD 74.2 million, decreased 10.4% over the prior year mainly due to lower equipment sales,
• Revenue from eastern Canada stood at CAD 151.9 million, decreased 9.8% over the prior year primarily due to lower equipment sales in the material handling, power generation and forestry categories and lower industrial parts sales.
• EBIT decreased CAD 1.0 million, or 4.9%, to CAD 20.0 million in the second quarter of 2020 versus CAD 21.0 million in the same period of 2019
• Adjusted EBITDA margin increased to 8.8% in the second quarter of 2020 from 8.7% in the same period of 2019.
• Cash flows generated from operating activities amounted to CAD 43.3 million in the second quarter of 2020, compared to CAD 20.5 million in the same quarter of the previous year.
• The Corporation’s leverage ratio decreased to 2.82 times on June 30, 2020, compared to 3.04 times on March 31, 2020. 

Risks: Wajax is exposed to the risk of weakness in the broader economies due to slow recovery of economic activities post lockdown measure lifted. Also, the company is exposed to the risk of the next wave of the virus outbreak.

Valuation Methodology (Illustrative): Price to Earnings

Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Stock Recommendation: Current business conditions, relating primarily to COVID-19 concerns and secondarily to weak resource markets in western Canada, continued to have a negative effect on the Corporation’s results during the second quarter of 2020. The volume declines in the first two months of the quarter improved in June as customer activity began to increase. WE expect the trend to continue going forward. Wajax expects to partially offset the effect of volume declines with cost reductions while managing customer service levels, working capital and capital spending accordingly. The Corporation’s current sources of liquidity are expected to be sufficient while preparing to return to growing the business and providing strong service to customers as conditions improve

Given bullish price trend in WJX shares, with price hovering above crucial short-term as well as long-term support levels, a lucrative dividend yield amid falling interest rate environment and valuation, we have given a “Speculative Buy” recommendation at the closing price of CAD 12.68 on October 07, 2020.

WJX daily technical chart. Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.