Wajax Corporation Posted Better Than Expected 2Q Results

Wajax Corporation, business
Wajax Corporation, business

On Thursday before market opened, Wajax Corporation delivered adj. EPS of $0.75 in second quarter, which was ahead of the Street views at $0.72, but little lower than our forecast of $0.76. Our adj. EPS excludes a $0.6 million charge for branch closures in the Equipment division. Revenue of $375 million was 3% lower than our forecast but 4% higher than second quarter of 2013, mainly because of higher sales in Power Systems. Company delivered EBIT of $20.8 million (5.6% margin), which was 3% ahead of our forecast of $20.3 million (5.4% margin) but EPS remained a to some extent light due to higher finance costs and a little higher tax rate.

Outlook remains cautious in spite of upgraded earnings and backlog. At the end of second quarter, the company’s consolidated backlog increased 43% from first quarter of 2014 to $226 million, which is 13% higher year-over-year and represents the highest level since second quarter of 2012.

In 2014, we estimate sales to be flat and adj. EBITDA to decrease by 2%. In 2015, we forecast sales to raise by 5% and EBITDA to bounce back 16%, driven by higher anticipated margins in all segments but mostly Industrial Components (restructuring).

In 2014, we estimate Company to realize segment revenue of $739 million, which would represent a fall of 4% year over year largely because of the reclassification of the rotating products segment to Industrial Components. We estimate adj. EBIT to raise by 15% to $52.5 million (margin of 7.2%) from $46.1 million (margin of 6.1%) in 2013. Margins have been relatively good in the division given a favourable inventory position and market share increases. In 2015, we estimate the segment’s revenue and EBIT to raise by 5% and 6%, correspondingly.

Firm has a long-term perspective and plans to invest in growth initiatives, while continuing to manage costs, its asset base, and leverage. Company anticipates the majority (81%) of its future earnings growth to be organic.

In 2014, we forecast a dividend payout ratio of 91% (based on EPS), falling to 77% in 2015 (in line with Company’s target). Company recently amended its credit facility and had its leverage ratio bank covenant updated to 3.26 times from the previous 3.1 times. We estimate a fairly healthy leverage ratio of 2.3 times at the end of 2014.

In 2015, we reduced our EPS forecast by 3% to reflect higher finance and tax cost assumptions. Our 12 months target price of $38.00 per share continues to be derived from the average of 8.1 times our FTM EBITDA forecast (one year forward) less average FTM net debt and 11.1 times our FTM EPS forecast (one year forward). Our chosen target multiples are almost stable with Company’s five-year average forward trading multiples of 8.2 times and 11.3 times.We kept our 12 months target price of $38.00 per share and “Sector Perform” rating.


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