Wajax Corp (TSX: WJX) is a Canadian distributor of industrial components. Its core business is the sale of parts and service support of equipment, power systems, and industrial components through a network of branches in Canada. 

Key highlights

Strong start in FY 2022: Building on a record sales and profitability performance in 2021, the business had a great start to 2022. Its sales climbed by CAD 52.4 million, or 13.5%, to CAD 439.5 million in Q1 2022, from CAD 387.1 million in pcp, thanks to strong growth across the board. This substantial sales increase was critical in boosting other crucial financial figures such as gross profit, EBIT, and net income.

Source: Company Filing, Analysis by Kalkine Group

• Bright outlook: Combined with the Corporation’s strengthened balance sheet and expanded product and service offerings it continues to see sound fundamentals in many of its key markets, bolstered by improving commodity prices and increased capital spending. This positive view of the market remains counterbalanced by the unpredictable COVID-19 pandemic and related supply chain issues.

• Consistently Improving backlog: The Corporation’s backlog of CAD 540.1 million on March 31, 2022, increased by CAD 263.6 million, or 95.3%, compared to March 31, 2021. This elevation in backlog was mainly due to higher orders in most categories, most notably the construction and forestry, material handling, power systems and the ERS and industrial parts categories. The backlog is rising sequentially, which is a significant positive since it enhances the company's ability to get greater orders from all categories.

Source: Company Filing

• Trading at discounted valuations: The company’s shares are available at an NTM EV/Sales multiple of 0.4x compared to an Industry (Industrials) median of 1.4x. While on NTM EV/EBITDA multiple the stock is trading at 4.9x compared to 8.3x. This implies that the shares are trading at discount against an industry median. The table below reflects the picture.

• An income play: The trust has reported a stable dividend payment over the years, aided by consistent cash flows. Recently, the Corporation declared a dividend of CAD 0.25 per share for the second quarter of 2022 payable on July 5, 2022, to shareholders of record on June 15, 2022. The stock offered a dividend yield of 4.378%, which seems lucrative considering the current interest rate scenario, which would attract several investors looking for a consistent income stream.
  

Risks associated with investment

The company is subject to a number of risks and uncertainties which could have a material adverse effect on its future profitability and financial position. Such risks and uncertainties include, but are not limited to volatility in metal prices, cyclicality of the industry, volatility in energy industry, significant competition, sources of metals supply and supply chain disruptions, manufacturers selling directly, laws and governmental regulations etc. 

Financial overview of Q1 2022

Source: Company Filing 

• In Q1 2022, the company’s revenue increased 13.5%, or CAD 52.4 million, to CAD 439.5 million, from CAD 387.1 million in pcp. An increase was mainly due to healthy performance from each segment.
• Gross profit increased CAD 17.7 million, or 23.2% to CAD 93.6 million against CAD 75.9 million in pcp, mainly due to increased volumes and margins, and a higher proportion of industrial parts and ERS sales compared to equipment sales.
• Net earnings in the reported period increased to CAD 16.0 million compared to CAD 12.4 million, supported by higher revenues and lower finance cost in the reported period of Q1 2022, partially offset by higher income tax.

Valuation Methodology (Illustrative): EV to EBITDA based

Analysis by Kalkine Group 

Stock recommendation 

The Company achieved solid sales of CAD 439.5 million in the first quarter of 2022, up by 13.5% year on year, and increased gross profit margins. Its leverage ratio fell to 1.24 times, and it had a record quarter end backlog of CAD 540.1 million, which is increasing sequentially primarily owing to greater orders in most categories, particularly construction and forestry, material handling, power systems, and the ERS.

Furthermore, with the Corporation's strengthened balance sheet and expanded product and service offerings, the Company continues to perceive solid fundamentals in many of its core markets, boosted by higher commodity prices and increasing capital investment, which is a significant positive.

Hence, considering all above discussed rationales we recommend a ‘Hold’ rating on the stock at the last closing price of CAD 22.84 as on May 17, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as on May 17, 2022). Source: REFINITIV, Analysis by Kalkine Group

The reference data has been partly sourced from REFINITV

Disclaimer

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