WSP Global has quietly become a heavy hitter on the global stage in engineering and construction.
While SNC Lavalin hogged the headlines for all the wrong reasons, WSP has been making strategic acquisitions and growing at an impressive rate.
Here are hi-lights, with explanatory charts, of a research report breaking down why the company’s latest purchase is “transformational” and puts WSP squarely at the forefront of the environmental, social and governance (ESG) trend:
- WSP Global (TSX:WSP)
- Rating: Outperform
- Price Target: Raised to $123 (Canadian) from $109
- 12-Month Upside Potential: 15%
Increasing exposure to the Environmental Services end-market
The increasing adoption of ESG and sustainability practices, as well as the increased focus on climate change is expected to be a meaningful demand driver for the engineering and construction (E&C) industry.
During our recent fireside chat with André-Martin Bouchard, WSP’s Global Director, Environment & Resources, on December 2, it was noted that ESG is in fact supporting demand in the E&C space, with “above GDP” growth expected in related end-markets.
This acquisition also increases WSP’s mix of revenue from Strategic Advisory Services (to ~45% from ~35% as of 2018).
Strategic Advisory Services are conducted upfront (i.e., at the beginning of the project lifecycle), often do not require an engineer to “sign and seal” the work upon completion, and tend to be of lower risk in nature.
Assisting customers with upfront work (permitting, impact assessments, preliminary design, etc.) should help WSP expand its role in projects and create cross-selling opportunities as the projects advance.
Investment summary
A resilient and well-diversified platform – WSP is a global professional services company with ~90% of its Net Revenue generated in OECD countries.
WSP’s well-diversified business is the culmination of a patient and consistent strategy to establish a pure-play global professional services company.
WSP has delivered an average annual organic growth rate in the mid-single-digit range, and has undertaken ~120 acquisitions since its 2006 IPO.
WSP’s exposure to both public and private clients (56% and 44% of 2019 Gross Revenue, respectively) should also provide stability throughout the economic cycle.
Track record of successfully delivering against guidance and Street expectations
In January 2019, WSP unveiled its 2019-2021 strategic plan, which included financial targets as well as plans to further diversify its revenue by end- market and service offering.
This most recent plan targets Net Revenue of $8-$9 billion from $6 billion in 2018 and represents a ~12.2% command annual growth rate (CAGR) at the mid-point), an Adjusted earnings before interest, taxes depreciation and amortization (EBITDA) margin of 15.0%-16.0%, and an employee count of 65,000 (~35% higher vs. ~48,000 in 2018).
We believe the company is well positioned to deliver against these targets, but we would highlight the potential for further macro headwinds resulting from COVID-19 as the primary risk that could impact WSP’s progress over the next 12-18 months.
M&A to remain a growth driver – Between 2006 and 2019, WSP generated a Net Revenue CAGR of ~36% and an Adjusted EBITDA CAGR of ~33%, which is attributable to a combination of consistent organic growth and a steady stream of acquisitions.
Looking ahead, we expect M&A to remain a key driver of top-line growth. Management has highlighted the U.S. market, and the Environment and Water sectors as areas of interest.
Transaction overview
WSP Global Inc. entered into an arrangement agreement for the acquisition of the outstanding shares of Enterra Holdings Ltd., the holding company of Golder Associates.
Under the terms of the agreement, WSP will acquire Golder for ~US$1.14 billion (~C$1.5 billion), which represents ~10.4x Golder’s 2020 Adjusted EBITDA (~8.4x post-synergies).
The transaction is expected to generate out synergies of $35 million over 24 months.
Management is indicating that the transaction is expected to be “mid-teens” accretive once the synergies are fully realized.
The transaction is expected to close in the first half of 2021 and we note that ~99% of Golder’s Partners (holding ~83% of Golder’s shares outstanding), have voted in favor of the acquisition.
Transaction Financing
The acquisition will be financed by C$310 million private placements of subscription receipts (C$260 million with GIC Private Limited and C$50 million with British Columbia Investment Management Corporation), and a new C$1.2 billion underwritten bank financing.
The decision to add two new cornerstone investors alongside the two existing large shareholders (Caisse de dépôt and CPPIB) strengthens the investor base of the company and better positions WSP to pursue additional acquisitions over the long run.
Achieving its 2021 objectives ahead of expectations
With the Golder transaction, WSP will achieve its 2021 targets for Net revenue, Adjusted EBITDA margin, end-market exposure, and % of revenue from Strategic Advisory Services.
We note WSP’s 2021 targets in Exhibit 3 below.
Strategic rationale for WSP
Strategic Advisory, 45%
This is a transformational acquisition for the company’s Environmental Servicesplatform – on a pro-forma basis, this end-market will become the second largest practice for WSP, catapulting the Property & Buildings segment.
The two largest “segments” for WSP prior to the announcement were Transportation & Infrastructure and Property & Buildings (~53% and ~26% of 2019 Net Revenue, respectively).
Following the acquisition of Golder, Transportation & Infrastructure will remain the largest end-market for WSP (~47% of pro-forma Net Revenue); however, Environmental Services will now become the company’ssecond largest end-market (at ~25% of Net Revenue), followed by Property & Buildings (at ~21%).
Disclosure: RBC Capital Markets has provided investment banking services to WSP Global within the last 12 months.