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

• Elevated cash from operations: In 2021, cash flows from operations totaled CAD 190.1 million, up from CAD 118.8 million in 2020. The CAD 71.3 million increase in cash generated was primarily due to a CAD 52.7 million increase in cash generated from changes in non-cash operating working capital and a CAD 31.1 million increase in net earnings excluding items not affecting cash flow, offset partially by a CAD 8.4 million increase in income taxes paid.

• Improved backlog: The Corporation's backlog of CAD 419.1 million as of December 31, 2021 rose by CAD 237.4 million, or 130.7%, compared to December 31, 2020, owing to stronger orders in all categories, including higher industrial components and ERS orders with the inclusion of Tundra's backlog. 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

• Curtailing leverage: The Company's leverage ratio fell to 1.29 times on December 31, 2021, from 2.28 times on December 31, 2020, as a result of lower debt due to considerable cash generated from operational activities and greater trailing 12-month pro-forma adjusted EBITDA. It also reduced its senior secured leverage ratio to 0.82 times as of December 31, 2021, from 1.73 times as of December 31, 2020.

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 1.6x. While on NTM EV/EBITDA multiple the stock is trading at 4.6x compared to 8.7x. This implies that the shares are trading at discount against an industry median. The table below reflects the picture.

Source: REFINITIV, Analysis by Kalkine Group 

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 FY 2021

Source: Company Filing

• In FY 2021, the company’s revenue increased 15.1%, or CAD 214.6 million, to CAD 1,637.2 million, from CAD 1,422.6 million in 2020. An increase was mainly due to healthy performance from each segment.
• Gross profit increased CAD 69.9 million, or 26.7% to CAD 331.8 million against CAD 261.9 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 53.2 million compared to CAD 31.6 million in pcp.

Valuation Methodology (Illustrative): EV to EBITDA based

Analysis by Kalkine Group 

Stock recommendation

Wajax generated a record CAD 1.6 billion in revenue in 2021, a 15% increase over the previous year. Despite the unpredictability of the COVID-19 pandemic and related supply chain issues, the company generated CAD 190 million in cash flows from operating activities during the year, and its leverage ratio dropped to 1.29 times on December 31, 2021, its lowest level in a decade, which is a significant positive.

The company enters 2022 with a record start-of-year backlog of CAD 419 million, registering orders from almost every industry, which depicts the positive macros. Furthermore, at the last closing price the stock is offering a healthy dividend yield of 4.99%, which looks appealing considering the current interest rates. 

Hence, considering all above discussed rationales we recommend a ‘Buy’ rating on the stock at the last closing price of CAD 20.04 as on April 19, 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 April 19, 2022). Source: REFINITIV, Analysis by Kalkine Group

Technical Analysis Summary

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.