One Small-Cap Industrials stock to Punt on-WJX

Wajax Corporation (TSX: WJX) operates through an integrated distribution system providing sales, parts and services to a wide range of customers across construction, forestry, mining, industrial and commercial, oil sands, transportation to name a few.

Key Highlights:

• Solid growth from Industrial Parts and Services: In FY21, the group reported a robust growth from its Industrial Parts and Services at CAD 679.8 million versus CAD 506.8 million in FY20. This was primarily driven by strong momentum within the engineered repair services and industrial parts strength due to the acquisition of Calgary, Alberta-based Tundra Process Solutions Ltd during earlier 2021.
• Consistent Growth in Backlog: In the recent past, the company reported a stable growth in its backlog, which is encouraging as it denotes improved future revenues. Backlog increased by CAD 47.5 million from Q3FY21, reflecting a growth of 12.8% on q-o-q basis, supported by higher construction and forestry orders and higher industrial parts orders. Moreover, the company reported its backlog of CAD 419.1 million in Q4FY21, which is the highest since Q4FY20.

                                     Source: Company Presentation 

• Improved margins on y-o-y basis: In FY21, the company reported its gross profit margin and operating margin of 20% and 5.6%, respectively, which improved from 18.4% and 4.5%, respectively, in FY20. This indicates higher operational efficiencies sue to better cost structure. Notably, the company reported its net margin of 3.3% in FY21, as compared to 2.2% in FY20.

• Acquisition of Process Flow: Recently, the company acquired Process Flow, which is a specialist provider and engineered integrator of industrial process pumps, valves and monitoring and control systems. The price of the above acquisition was ~CAD 3.96 million, along with a three-year performance-based earnout of up to CAD 0.65 million in the aggregate, payable in cash. Process Flow has long-established customer and supplier relationships, along with renowned technical expertise and customer service segments and is expected to enhance the company’s presence within the Industrial Parts and Engineered Repair Services segment.

Risks Associated with the business:

The demand for the company’s products and services may be affected by the general economic conditions at global or local level. Hence, it might dampen the company’s order book and future performance.

FY21 Financial Highlights:

FY21 Income Statement Highlights (Source: Company Report)

• In FY21 revenue stood at CAD 1,637.2 million, surged from CAD 1,422.6 million in FY20. The growth was aided by strong momentum from Industrial Parts and Services along with decent growth from Heavy Equipment segment.
• Gross profit grew to CAD 331.8 million from CAD 261.9 million in FY20, thanks to the elevated revenue, partially offset by higher cost of sales.
• The group reported higher earnings before finance costs and income taxes of CAD 92.3 million, as compared to CAD 64.5 million in FY20. This was primarily driven by higher gross profit and slightly lower finance costs, while an increase in Selling and administrative expenses stood as a drag.
• Net earnings stood at CAD 53.2 million, surged from CAD 31.6 million in FY20, due to higher earnings before finance costs and income taxes as mentioned above, partially offset by an increased income tax expense.

      Valuation Methodology (Illustrative): EV to Sales- based

     Analysis by Kalkine Group

Stock Recommendation:

Despite the sluggish economic scenario, the company reported its dividend distribution of CAD 21.0 million in FY21, as compared to CAD 20.0 million in FY20. This is impressive as most of the companies are lowering their dividend distribution in order to retain liquidity. Moreover, the stock of WJX is carrying a dividend yield of ~4.99% on an annualized basis, which looks attractive considering the ongoing interest rate scenario. We have valued the stock using the EV to Sales-based relative valuation method and have arrived at a double-digit downside (in percentage terms). For the said purposes, we have considered peers like Doman Building Materials Group Ltd, Russel Metals Inc etc. Considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock of WJX at the last closing price of CAD 20.04 on March 29, 2022. 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 March 29, 2022). Analysis by Kalkine Group

Technical Analysis Summary:

Disclaimer

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