Our view: WSP Global Inc. ("WSP") reported good Q3 results and the outlook also remains favorable, in our view. We remain constructive on WSP given the combination of supportive industry tailwinds and good execution on the part of management. Revising our price target +$24 to $196; reiterate our Outperform rating.
Key points:
Thoughts on positioning heading into late-2021 – Q3 results reflected good progress across all markets (positive organic growth in every region) and 100 bps of Adjusted EBITDA margin improvement. The E&C space is benefiting from a number of tailwinds, namely: 1) the significant investment in infrastructure globally following the impact of the pandemic; 2) an improving macro backdrop (which is driving private sector demand); 3) strong commodity prices supporting demand in the Energy/Mining markets; and 4) ESG/sustainability-driven demand. Against this backdrop, we view WSP as the best-in-class name through which to play these themes. WSP's valuation has trended higher over the last year; however, the company continues to execute very well (consistent quarterly results), there has been an upward bias to guidance, and the company's balance sheet is in good shape (just 7 months after closing the Golder transaction) and can already support another large acquisition. We maintain our positive view and believe the company is well positioned to capitalize on the broader tailwinds while also driving improved efficiencies internally (i.e., higher margins). The next catalyst (in the absence of meaningful M&A) is likely to be the new strategic growth plan, which will likely be introduced in early-2022.
Favorable outlook for the U.S. – In the U.S., the "soft" backlog was up ~60% YoY in Q3 (Q2 was +75% YoY). With the recent passage of the infrastructure bill (President Biden expected to sign the bill on November 15), WSP noted it could take at least 3-6 months before funds enter the pipeline. The "soft" backlog conversion into "hard" backlog has likely been muted YTD as clients awaited the passage of this bill to get clarity/certainty on funding ("soft" backlog up ~7-fold YTD). We believe "hard" backlog in the U.S. should grow significantly mid-2022 onwards as the funding from this bill makes its way through the system.
Core markets outside the U.S. also have a supportive outlook –
Outside the U.S., WSP's core markets are also well positioned given the significant infrastructure commitments. These include: 1) C$100B of funding committed by the Canadian government over 3 years (includes ~C$18B in green spending aligned with the Paris Climate Accord goals); 2) a ~3.8% annual increase in investments related to spending on health, education, transport, and other public services per year by the U.K. government (see our note on the U.K. spending budget here); and 3) A $225B allocated for general government sector infrastructure spending in Australia.