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Sometimes a little boring is better
The Canadian equities markets are often fraught with volatile situations, be it in mining, energy, small cap technology, or most recently the plethora of cannabis related companies to list on the public markets. This creates a rather dynamic environment that doesn’t often let the typical investor sleep well at night, and we tend to forget that in Canada sometimes it is better to focus on less crowded trades. Against this backdrop, we like to find businesses that demonstrate operational consistency with identifiable catalysts.
Savaria (SIS-TSX) is an accessibility company purchased in 1989 for $200,000 by the current CEO, Marcel Bourassa when the business had sales of $200,000. The company is a North American leader in personal mobility products and does business in two segments: Accessibility (stairlifts, elevators, wheelchair lifts ect.) and Adapted Vehicles (van conversions). Over the past 20 years Marcel has grown the company into a $600M market cap, acquisition focussed leader with a $230M revenue runrate, which includes its recent acquisition of Span-America Medical Systems. The accessibility industry is benefiting from major demographic tailwinds, which should persist into the foreseeable future – an aging population and a willingness to spend money to facilitate the lifestyle of those individuals. Additionally, governments are mandating increased wheelchair access to public and commercial spaces.
Old school alignment with shareholders
Savaria demonstrates old school alignment of company management with shareholders. Over the years, management has kept the majority of its holdings in the company and currently own approximately 37% of the outstanding shares. In the most recent equity financing Marcel Bourassa (Chairman, President and CEO) and Jean- Marie Bourassa (CFO) added to their already significant insider ownership positions by acquiring a combined 10% of the offering (276k subscription receipts). In addition, the founders draw low salary/bonus compensation and do not grant themselves stock options or RSUs. The lion’s share of management compensation comes from dividends.
A defensible franchise with a runway for growth
Savaria’s growth profile, strong balance sheet, growing free cash flow and acquisition strategy make it a compelling company to own from a catalyst standpoint. Most of Savaria’s competitors are owned by private equity who are looking to maximize mediumterm cash flow rather than drive growth or market share.
The company’s most recent acquisition of Span-America (SPAN-NASDAQ) was highly complementary to its existing product line, with almost no overlap in existing markets, customer base or products. The acquisition gives Savaria US manufacturing, and gets the company into the institutional and government markets with a whole new product line that pairs well with its existing offering. Revenue increased by 70% to over $200 million and EBITDA by 50%. Although mildly accretive to EPS, the acquisition was 25% accretive to FCF per share and sets the company up for further near-term acquisitions. By funding part of the acquisition with the equity offering, SIS has kept flexibility on its balance sheet with room for an acquisition to potentially add an incremental $10 million in EBITDA (similar to SPAN) without additional equity. SIS plans to reach $500 million revenues within 5 years and the CEO sees plenty of strategic M&A opportunities which could further enhance the business.
It’s not a “rollup”
As opposed to a “rollup” strategy of buying businesses and cutting costs, Savaria has demonstrated a proven track record of growth for practical reasons. Years ago, Marcel sent his son to China for 7 years to establish the company’s low cost manufacturing which gave them a cost and specialized manufacturing advantage over its competitors. The acquisition of Silver Cross provided 16 retail franchise locations within the Greater Toronto Area plus 5 in the US – since then SIS has taken some locations and made them corporate stores. Shoppers Drug Mart’s Home Health Care’s automotive unit doubled the size of SIS’s auto-conversion operation and materially increased market share and gave the company coast-tocoast retail presence in the major cities. This included a warehouse in Burnaby, B.C. which will be used for distribution as well.
Savaria has now added a US distribution channel to access the US healthcare market with the SPAN acquisition. Currently Span-America brings to Savaria a direct sales force with access
to long term care and acute care institutions across North America, the US department of Veterans affairs, and leading US healthcare distributors such as McKesson. This distribution channel should lead to a marked acceleration in revenues for Savaria’s new ceiling lift in the near term, and for other healthcare-related products in the long term. In addition, approximately 10% of Span-America’s sales are to the US home care market, which is a market that Savaria knows and serves with its lift products and through its Silver Cross retail network in Canada.
Acquisitions should continue to drive multiple expansion
Although Span-America’s underlying organic growth rate at 3-4% is lower than Savaria’s existing business, the company remains comfortable in its ability to generate a long term organic growth rate of 10%. The market has rewarded Savaria with a higher earnings multiple based on its strong revenue and EPS growth over the past several years. This currency has enabled Savaria, through the Span- America acquisition, to expand its revenue base by 60% and EBITDA by 26% while only increasing its share count by 7%. Balance sheet leverage remains favourable at less than 1.0x EV/EBITDA (2H17 annualized). A strong equity currency is clearly an asset for an acquisition-minded company like Savaria. At 13x 2018 EV/EBITDA the company trades at a significant discount to the 19x EV/EBITDA for its US Healthcare equipment manufacturer peer group which we feel is where Savaria can trend towards over time. Although there are no perfect public comparable companies, the current multiple is indicative that management has executed well over time and will be rewarded by the market as management continues to acquire complimentary businesses.
Conclusion
Savaria has recently concluded a transformational acquisition which extended a consistent track record of acquiring companies for the right reasons. The landscape remains very conducive towards future growth and a tuck in to the legacy business or a western US based lift company could make sense as catalysts to drive the company towards management’s goal of $500M in sales in the next 5 years. Meanwhile, we have a double digit, volume-driven growth story that has just opened up a brand new market. The company has net cash, strong EBITDA margins and above average EPS growth which may seem strange in a world of overnight successes. Perhaps taking the time to look at a company that has built itself up over the past 30 years may seem like a bit of a slog, but sometimes there is truth to the saying “a little boring is better”.
Article by Capitalize For Kids
