SISXF - Savaria Likely To Fare Well In A Recession

2023-04-19 08:19:13 ET

Summary

• The US economy could enter into a recession later this year and stocks that shouldn’t be affected much by the economic cycle could outperform.
• In my view, Savaria is likely to continue growing revenues by about 8% per year organically over the coming years thanks to a rapidly aging population in its main markets.
• The company is valued at 11.5x EV/EBITDA and it has often traded above 15x EV/EBITDA over the past several years.
• A multiple of 15x EV/EBITDA translates into a share price of C$22.23 ($16.61) which represents an upside potential of 41.2%.

Introduction

I like to write about companies that lack coverage on SA, and today I'm taking a look at Savaria ( SIS:CA ) ( SISXF ). It’s a Canadian mobility products manufacturer that has been growing rapidly over the past several years and offers a decent dividend as the forward yield stands at 3.3%. I think that Savaria could be a good investment in a potential recession as its business should benefit from the rapidly aging population in North America and Europe. Let’s review.

Overview of the business and financials

Savaria was established in 1979 and specializes in the production and installation of accessibility equipment including wheelchair lifts, stairlifts and accessible vehicles for home and commercial applications. This business comprises Savaria’s accessibility segment, and the company has two other operating segments – patient care, and adapted vehicles. The patient care segment focuses on the production of ceiling lifts, medical beds, and pressure management products among others. The adapted vehicles segment, in turn, builds lowered-floor wheelchair vans. Savaria has manufacturing facilities across 11 countries in North America, Europe, Oceania, and Asia and revenues are split almost evenly across the commercial and residential sectors.

Looking at the financial performance of Savaria over the past decade, we can see that revenues have increased over 10 times. However, there don’t appear to exist any economies of scale as the operating income margin has declined from 9.9% in 2013 to 8.8% in 2022. This is a highly fragmented industry with many small players and the majority of the revenue growth has been achieved through M&A.

Some of the notable small acquisitions over the past years include Silver Cross (2014), Shoppers Home Health Care (2016), Premier Lifts (2017), H.E.S. Elevator Services (2018), Silvalea (2019), and Ultron Technologies (2020). Savaria also acquires larger rivals from time to time and it has completed three purchases for C$100 million ($74.7 million) or above over the past few years - Span-America for C$109.5 million ($80.2 million) in 2017; Garaventa Accessibility for C$100 million ($76.5 million) in 2018; and Handicare Group for C$452.3 million ($355.3 million) in 2021. Unfortunately for investors, all of the large acquisitions were financed by significant capital increases (the company distributes almost all of its earnings as dividends) – C$38.4 million ($28.2 million) in 2017; C$57.3 million ($44.5 million) in 2018, and C$122 million ($95.7 million) in 2021. The number of shares outstanding has thus soared from 36.4 million in 2016 to 64.5 million as of the time of writing. As a result, the EPS increased by just 61.8% between 2016 and 2022. This translates into a compound annual growth rate ((CAGR)) of 8.35%, which I consider to be a decent level although it’s significantly lower than the 19.2% CAGR for net income over the same period.

Looking at the 2022 financial results, I think that it was a strong year for Savaria as 12.7% of the 19.4% improvement in revenues was thanks to organic growth. Yet, operating margins were under pressure due to materials cost inflation. The company wasn’t able to pass on the cost increases to its clients completely and the gross profit margin declined by 40 basis points to 32.2%. The EBITDA margin remained unchanged as selling and administrative expenses as a percentage of revenue declined by 1.9% as their fixed portion showed little change. As this is a low-margin business, the SG&A cost discipline led to an almost tripling of net income.

Turning our attention to the balance sheet, net debt grew to C$369.4 million ($276.1 million) from C$373.8 million ($279.4 million) a year earlier as dividend payments totaled C$32.5 million ($24.3 million). Yet, the net debt to adjusted EBITDA ratio declined to 3.07x from 3.73x in 2021 thanks to the improved profitability and the balance sheet looks in a much better condition at the moment.

For 2023, Savaria forecasts revenues to expand by about 8-10% with expected adjusted EBITDA margins of approximately 16%. In my view, the revenues are likely to continue growing by about 8% organically over the coming years as demand for the company's products increases at a steady pace thanks to a rapidly aging population in North America and Europe (in 2022, the USA, Canada, and Europe accounted for 84.5% of revenues). According to data from the U.S. Department of Health and Human Services, the proportion of people aged 65 and over is expected to grow to 22% by 2040, compared to 17% in 2020. In absolute terms, the number of people aged 65 and over in the USA is forecast to soar by over 45% to 80.8 million.

The demographic situation in Canada and Europe looks similar to this and considering the latest U.S. Federal Reserve minutes show that there could be a recession in 2023 , I think that Savaria is a good investment at the moment. This is a business that is mainly affected by demographic factors which means it could be a safe haven in turbulent times.

Valuation

Looking at the valuation of Savaria, the enterprise value stands at C$1.38 billion ($1.03 billion) as of the time of writing and the company is trading at an EV/EBITDA multiple of 11.5x. This might seem high at first sight but keep in mind that Savaria has often been valued at above 15x EV/EBITDA over the past few years. I expect the ratio to surpass this level in the near future as the organic growth prospects look compelling.

Looking at other key valuation metrics, Savaria is also trading below its average 5-year price/cash flow, P/B, and P/S ratios. In my view, the margin of safety here looks compelling based on historical multiples.

Risks

Looking at the risks for the bull case, I think there are two major ones:

- it’s possible that further cost inflation puts additional pressure on gross margins although this risk seems limited considering inflation across North America and Europe has been slowing down over the past few months.

- Savaria could carry out another large acquisition in the coming months which is financed by a new capital increase. The potential stock dilution could lead to a decline in EPS over the short term.

Investor takeaway

The population of developed countries across the world is aging rapidly and this is set to help Savaria book solid organic revenue and income growth over the coming years. If a recession is coming in the next few months, I think that this could be a compelling investment as the business isn’t affected by the economic cycle to a significant extent.

In my view, Savaria is undervalued at the moment considering that it has often traded above 15x EV/EBITDA over the past several years. This multiple translates into a share price of C$22.23 ($16.61) which represents an upside potential of 41.2% as of the time of writing.

Editor's Note : This article was submitted as part of Seeking Alpha’s Best Investment Idea For A Potential Recession competition, which runs through April 28. This competition is open to all users and contributors; click here to find out more and submit your article today!

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