By Keegan Taberner
Savaria (OTC:SISXF) is a leader in the accessibility industry. Savaria designs, builds, and retails personal mobility products in the accessibility (stairlifts, elevators, and platform lifts) and adapted vehicles (van conversions) segments. The company's accessibility and adapted vehicles segments represent 84% and 16% of revenues respectively. In terms of global exposure, 54% of total revenues come from the US, 37% from Canada, and 9% internationally. Savaria has generated solid five-year annual growth rates of 8.5% for revenue and 22.1% for EBITDA.
Well-Positioned to Serve the Aging Demographic
Savaria is well situated to service a population which is both aging and growing obese. Revenue drivers include the aging population, a growing desire to age at home, and high obesity rates. Savaria intends to grow through organic growth initiatives such as adding franchises and introducing new products, and possibly through inorganic acquisitions (as suggested by management). Savaria's strong balance sheet and cash flows should support growth initiatives and historically healthy dividends (forward 3.8% yield).
Valuation & Recommendation
Savaria is a leader in the accessibility industry which is experiencing strong macroeconomic tail-winds. However, the company has no observable economic moat, and therefore we cannot see the historical growth rates of 8.5% for revenue and 22.1% for EBITDA continuing. Based on a discounted cash flow valuation, the implied intrinsic value of the company's shares is approximately $5.72, which is very close to the current market price, thus we recommend a hold rating. If the market price were to ever fall significantly below the intrinsic value, or if an investor was simply looking for a dividend stock (which yields a healthy 3.8%), we would support a buy decision.
The company's stairlifts, elevators, and platform lifts are manufactured, assembled, and personalized at the Brampton, Ontario, plant. The Huizhou, China, plant is the main supplier of components for the Brampton plant. Savaria expects continued margin expansion by increasing the quantity of components sourced from its Huizhou plant and by the introduction of new, higher margin products such as a stairlift for curved staircases. The accessibility segment also includes operations that came from the acquisition of Silver Cross in 2014, which include a franchise network through which new and used accessibility equipment is sold, and a sales lead generation program.
Source: Company website
The adapted vehicles segment adapts vans through the Van-Action and Freedom Motors subsidiaries located in Montreal, Quebec, and Brampton, Ontario, respectively. The vans are made wheelchair accessible through a lowered floor and ramp system. Vans are converted and are sold either directly to customers or through dealer resellers. They can be for personal use or commercial use (taxis).
Source: Company website
Savaria acquired Concord Elevator and Van-Action in 2005, Liberty Motor Co. and Viewpoint Mobility in 2010, and Silver Cross in 2014. Silver Cross was acquired for cash consideration of $4.7 MM ($2.5 MM of which was due immediately and $2.2 MM payable in eight semi-annual installments beginning in six months from the purchase date).
Silver Cross operates 16 franchise retailers across Canada, plus 1 corporate store in Oakville, Ontario. These locations retail new and used accessibility equipment. It also operates a sales lead generation and distribution program. Revenue is generated from selling the sales leads to distribution partners and franchises for $35 per lead, and from 5% royalty fees on all sales from the franchise locations. We believe this acquisition provides several growth opportunities for Savaria:
1. Lead Generation
Silver Cross collects sales leads through their internet website, which are then sold to distribution partners and franchises at $35 per lead. Silver Cross will allow Savaria to increase accessibility and adapted vehicle revenues by selling leads to Savaria dealers which will increase the sales of Savaria's products.
2. Increases Sales of Savaria products
By acquiring Silver Cross, Savaria intends to strengthen the sales of its products across Canada through the Silver Cross stores and through the dealers to which Silver Cross distributes leads.
3. Increased Store Presence
Savaria plans to increase the number of Silver Cross franchise locations in North America to approximately 50 over the next 3-4 years. The franchise locations will be added in Canada first, before expanding into the US.
Lack of Economic Moat
Savaria has generated annual revenue growth rates of 8.5% for the past five years, but it lacks the economic moat required to continue generating excess returns. Savaria holds no patents and therefore competitors produce nearly homogeneous products of similar quality. Additionally, individual customers usually represent a single sale, so brand value is limited. Nevertheless, Savaria has made an attempt to develop a moat through brand value by recognizing the importance of quality post-sales service and has marketed itself as the most reputable in the industry. Unfortunately, with little to no barriers to entry, Savaria's excess returns will eventually be eroded away.
A stock issue in Q2 2015 raised a net $11.2 MM which leaves Savaria with a current cash position of $27.5 MM. Savaria's debt is comprised of a series of loans and notes payable, which total to $17.7 MM and have a weighted average interest rate of 4%. Debt is adequately covered by cash, and future cash flows are sufficient to cover future interest payments.
Savaria has paid dividends on common shares since 2005. The average payout ratio has been 77% (which excludes 2007 due to negative net income). The current dividend yield is a healthy 3.8%. This high payout ratio is, on the surface, a positive signal for shareholders but may be indicative of a lack of future investment opportunities for the company.
With a market capitalization of less than $200 MM, it is understandable that Savaria is not widely held by institutional investors. However, Fiera Capital holds 11.5% of shares outstanding, SEI Investments holds 1.7%, and Natcan Investment Management holds 1.0%. None of these firms have activist intentions or have seats on the board of directors. Finally, approximately 46% of shares outstanding are held by Marcel and Jean-Marie Bourassa, who are the CEO and CFO respectively.
The Macro Environment
Prevalence of Mobility Disabilities Rises with Age
Mobility disability is Canada's third most prevalent disability at 7.2% of the population according to Statistics Canada. Seniors (65+) is the age group where this disability is most prevalent (20.5%). Similarly, in the United States, 7.1% of the population has an ambulatory disability according to Cornell University. The proportion rises to 23.2% when considering only the senior population.
The North American population is aging rapidly. The percent of the population which is 65 years or older is expected to rise from the current 15%, to 20% in 10 years, and to approximately 25% in 35 years according to Statistics Canada and the United States Census Bureau. This portion of the population is expected to grow at an approximate 3.5% annual growth rate for the next 20 years.
This demographic trend should drive revenues as the prevalence of mobility disabilities rises with age. Aging at home is also positive revenue driver for Savaria, as homes will need to be modified for use by those with mobility challenges.
Source: Statistics Canada and the United States Census Bureau
The prevalence of obesity in both Canadian and American adults has historically been rising, which we believe will drive the need for mobility products. According to Statistics Canada, in 2012, 18% of Canadian adults were classified as obese (BMI 30+). The number seniors which are obese has grown by an annual growth rate of 5% in the last 10 years. A similar picture exists in the US with the Centers for Disease Control and Prevention reporting that 35% of US adults are obese.
Source: Statistics Canada
Several North American cities have considered making 100% of their taxis wheel-chair accessible. In 2005, the Accessibility for Ontarians with Disabilities Act (AODA) was passed, which set a goal and timeframe to make Ontario wheel-chair accessible by 2025. As of July 1, 2014, all new taxicab licenses issued in Toronto will be wheelchair accessible. The 100% accessibility goal is unlikely, and therefore have not included this directly into our model. However, it should be taken as an indication for general regulatory pushes for accessibility and may be a possible future growth catalyst.
Management has stressed that the company's pipeline of potential acquisitions has never contained as many opportunities. We believe that Savaria is well positioned to take advantage of this strong pipeline with the support of its healthiest balance sheet in years. At the end of Q3 2015, Savaria had $27.5 MM in cash following a net $11.2 MM equity offering in Q2. However, without knowing what will be acquired, we cannot include this possibility for revenue growth in our model.
There are two main competitors in North America that offer similar product lines, Bruno Independent Living Aids and Garaventa. Competing products are of high quality and sold at competitive prices, but Savaria believes that what differentiates the company from its competitors is "the reliability and safety of its products and the quality of its aftersales service." It is worth noting that both Garaventa and Bruno Independent Living Aids have similar beliefs. Garaventa believes "reliability, safety and innovation" set them apart, while Bruno Independent Living Aids takes pride in "an unwavering focus on quality, safety and continuous improvement."
One of Savaria's main competitors, ThyssenKrupp Access, ceased its operations in the US in 2012, and as a result, Savaria was able to gain market share. ThyssenKrupp Access said in a statement that the closure was due to "ongoing weakness in the American housing market and sluggish U.S. economic recovery." While this is initially troubling, the economic trends that forced the closure of ThyssenKrupp Access do not appear to have materially affected Savaria.
Marcel Bourassa: President and CEO
Savaria was purchased by Marcel Bourassa in 1989 for $200,000. Savaria has been publicly traded since 2002 and Mr. Bourassa has consistently remained the largest shareholder with a current equity interest of 36%, which suggests that his incentives are well aligned with shareholders. It should also be noted that at 64 years old, Mr. Bourassa is nearing retirement, and the company will likely suffer without his leadership.
Jean-Marie Bourassa: CFO
Jean-Marie Bourassa has been Savaria's CFO and a Director since the IPO in 2002. He has been also the President and Director of Bourassa Boyer Inc., a CPA firm, since 1980. Jean-Marie owns 10% of Savaria.
Savaria is competing against other accessibility equipment companies, some of which may have larger financial, technical, R&D, marketing, and sales resources. Additionally, the two main competitors are private companies, which make this risk difficult to quantify.
Most of Savaria's sales are currently derived from a small number of products, and these products are expected to account for a substantial portion of Savaria's revenues in the future. Additionally, Savaria's products currently meet the requirements of the Canadian Standards Association (NYSE:CSA) and the American Society of Mechanical Engineers (ASME) which set requirements for design, construction, and testing. However, there can be no guarantee that the codes and standards will not change or that Savaria can ensure quality in new product offerings.
Savaria's future success likely depends on key personal, specifically Marcel Bourassa (President and CEO) because of his experience and knowledge regarding the business. It should be noted that at 64 years old, Mr. Bourassa is nearing retirement, and the company will likely suffer without his leadership. Additionally, failure to attract and retain personnel, particularly sales and technical personnel, could make it difficult for Savaria to meet growth objectives.
Management has made it clear that acquisitions are part of the company's growth plan. As such, there is a risk that it does not find suitable targets at the right price or that it faces challenges when integrating firms.
With over half of revenue coming from the United States and a portion of manufacturing operations in China, Savaria is exposed to exchange rate fluctuations. The risk is mitigated by raw material purchases in US dollars and a hedging strategy using forward contracts to guarantee a certain CAD/USD exchange rate. As per the hedging policy, anticipated sales in US dollars can be hedged up to a maximum of 75%.
Discounted Cash Flow
A discounted free cash flow valuation is driven by future free cash flows and a discount rate. Therefore, we will discuss each assumption required to calculate the unlevered free cash flow and the weighted average cost of capital below.
1. Operating Income
Savaria has generated five-year annual revenue growth rates of 8.5%. However, based on a lack of economic moats, we do not see this trend continuing. Instead, we have based our 5% annual revenue growth for the next five years (2016-2020) on the following four factors:
- Forecasted 3.5% annual population growth of seniors.
- Historical senior obesity annual growth trend of 5%.
- Increased sales of Savaria products through Silver Cross stores.
- Increase of Silver Cross franchise locations.
Due to the ambiguity surrounding the ability to maintain excess growth, we have sensitized our model to the five-year growth rate. Next, in the five years following (2021-2025), we expect to see a decline in growth as Savaria approaches the forecasted perpetual growth rate of 2%, which represents the approximate rate of GDP growth in North America. Additionally, as per management guidance, we have forecasted a gross margin improvement from 32% to 36% over the next five years due to the introduction of higher margin products such as a stairlift for curved staircases and an increase Chinese-sourced components.
2. Depreciation and Amortization
We have forecasted depreciation and amortization based on historical values as a percent of property, plant, and equipment (PPE). We expect that as PPE rises, the amount of depreciation will rise at the same rate. Annual depreciation has historically represented approximately 13% of PPE and we do not expect this to change in the future.
3. Capital Expenditures
We have forecasted capital expenditures based on historical values as a percent of sales. We expect that as sales rise, the firm will need to invest in more machinery, larger factories, etc. Capital expenditures have historically represented approximately 4% of sales and we do not expect this to change in the future.
4. Change in Net Working Capital
In our model, we have represented current operating assets as a percent of sales. As sales increase, current assets such as receivables and inventories will rise. Historically, current operating assets have represented approximately 36% of sales and we do not expect this to change.
We have represented current operating liabilities as a percent of COGS. As sales, and therefore COGS rise, we can expect current liabilities such as payables and warranty provisions to rise. Historically, current operating liabilities have represented approximately 30% of COGS and we do not expect this to change.
5. Weighted Average Cost of Capital
The weighted average cost of capital (OTC:WACC) is the rate of return that investors expect from Savaria. We calculated Savaria's WACC to be approximately 9% after taking firm specific factors such as the ratios of financing methods, tax rates, debt interest rates, and equity beta into account. It is worth noting that Savaria has no publicly traded debt, therefore a book value of debt and market value of equity have been used to calculate the ratios of financing methods. Savaria's WACC is seemingly low for such a small capitalization company, but this is easily explained by the company's beta of less than one and by low debt interest rates. In case any of these values change in the near future, we have sensitized our model to WACC.
Comparable Company Analysis
There are no pure comparable companies for Savaria, as all accessibility and adapted vehicles competitors are privately owned. However, for references sake, we have included a comparable company analysis which compares Savaria with the following companies:
1. ThyssenKrupp AG (OTCPK:TKAMY)
ThyssenKrupp AG is a Germany-based technology holding company. Its Elevator Technology division is active in the construction and servicing of elevators, escalators, moving walks, and platform lifts.
2. Kone Corp. (OTCPK:KNYJY)
Kone Corp. is a Finland-based engineering company that operates within the elevator and escalator sector. It offers products such as elevators, escalators, autowalks, and automatic door systems.
3. United Technologies Corp. (UTC)
United Technologies Corp. provides technology products and services to the building systems and aerospace industries across the world. The company designs, manufactures, sells, and installs a range of passenger and freight elevators, as well as a line of escalators and moving walkways.
4. Prism Medical Ltd. (OTC:PSDLF)
Prism Medical Ltd. is a provider of equipment and services used to move and handle mobility challenged individuals. The company manufactures a line of products, including fixed ceiling lifts, portable ceiling lifts, floor lifts, slings, shower chairs, and other ancillary patient handling products.
5. Hill-Rom Holdings Inc. (NYSE:HRC)
Hill-Rom Holdings Inc. partners with health care providers in more than 100 countries to focus on patient care solutions that improve clinical and economic outcomes. The company produces hospital beds, furniture, other medical equipment, and medical technology systems.
6. Henry-Schein Inc. (NASDAQ:HSIC)
Henry Schein Inc. provides health care products and services to office-based dental, animal health, and medical practitioners. The health care distribution segment of the company distributes consumable products, laboratory products, equipment repair services, surgical products, and diagnostic tests, among others.
By comparing Savaria with lift manufacturers and healthcare product manufacturers, we are able to gain insight on how the market is pricing Savaria versus similar companies. It is worth noting that the healthcare product manufacturers trade at much higher multiples than the lift manufacturers. If we weight the median output from the three multiples (EV/EBITDA, EV/EBIT, and P/E) used in the valuation evenly, we receive a share price of $6.21. This is significantly higher than the current share price of Savaria and must be taken with some skepticism due to the poor comparable base. With no pure comparable companies, we will not be placing any weight on the comparable company valuation and have simply included it for reference.
Savaria is a leader in the accessibility industry which is experiencing strong macroeconomic tail-winds due to the aging population, obesity, and a drive to improve accessibility. Savaria intends to grow though organic growth initiatives, such as adding franchises and introducing new products, and possibly through inorganic acquisitions. However, the company has no observable economic moat, and therefore we cannot see the historical growth rates of 8.5% for revenue and 22.1% for EBITDA lasting. After modeling the lower than historical growth and otherwise stable business, the implied intrinsic value of the company's shares is approximately $5.72, which implies a trivial 10.6% upside.
Therefore, due to current market pricing we recommend a hold on Savaria . If the market price were to fall significantly below the intrinsic value, or if an investor was simply looking for a dividend stock (which yields a healthy 3.8%), we would recommend a buy decision.
Appendix 1: Discounted Cash Flow Model
Appendix 2: Discounted Cash Flow Model
Appendix 3: Discounted Cash Flow Model
Appendix 4: Discounted Cash Flow Model
Appendix 5: Comparable Company Analysis
Appendix 6: Valuation Summary
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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