WSP Global Inc T.WSP

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January 10, 2022

Industrial Products: 2022 outlook 
Tailwinds in place, but we are mindful of valuations

Our view: The tailwinds that benefited the E&C and Equipment names through 2021 still appear to be largely in place heading into 2022, which we believe should be supportive of strong performance in 2022. There are, however, some additional considerations, including the potential for rate increases this year and into 2023 (which could impact outlook/multiples), potential for recent supply chain constraints to ease (timing remains uncertain), and potential fund flow impacts (which we have seen even in the first week(s) of this year, namely a switch into value). Against that backdrop, our top picks for 2022 include WSP Global (best large cap idea) and Finning International (best SMID cap/value idea).

Thoughts heading into 2022 – We expect the E&C and Heavy Equipment spaces to continue to benefit from the strong demand trends that have driven record backlogs across both sub-sectors. The significant infrastructure investments (recent and upcoming) and elevated commodity prices are driving strong demand across most end-markets/regions, with COVID-19 related disruptions/supply chain constraints being the most material headwinds to activity levels. We believe these two sub-sectors are well positioned amidst this backdrop and we maintain a favorable view on these spaces. See page 60 onwards for company 2022 outlooks and estimate changes.

• Aecon Group Inc. (“Aecon”) – reiterating our $20 price target and Sector Perform rating: We expect the strong infrastructure spend across Canada to be a steady tailwind; however, pandemic-related impacts are likely to continue at least through the early part of 2022 (likely to impact construction work and Bermuda airport concession). See page 65 for our proprietary Bermuda airport flight tracker.

• SNC-Lavalin Group Inc. (“SNC”) – reiterating our $42 price target and Outperform rating: We maintain our positive view given: 1) the outlook for continued progress in the Engineering Services platform (recent results have been in line with expectations); 2) the ongoing wind-down of the Projects segment (albeit with continued EBIT losses); and, 3) a significant valuation discount vs. Design peers that we believe should decrease over time.

• Stantec Inc. (“Stantec” ) – price target +$4 to $69; reiterating Sector Perform rating: We expect the company to benefit from strong demand in the U.S. given its sizeable exposure to that region (+50%); however, we are maintaining a cautious tone given the potential for a shortfall on organic growth targets for 2021 relative to full year guidance, which could impact shares. While the company recently closed the Cardno acquisition, we expect Stantec to remain on the lookout for M&A opportunities.

• WSP Global Inc. (“WSP”) – price target +$1 to $197; reiterating Outperform rating: WSP remains our best large cap idea given its track record of consistent results, quality M&A, and strong organic and M&A-driven growth in 2021. The upcoming 3-year Strategic Plan announcement and further M&A should serve as catalysts.

• Finning International Inc. ("Finning") – reiterating $43 price target and Outperform rating: Finning is our favorite SMID cap/value idea for 2022. Our favorable view is based on the strong fundamentals across its end-markets/regions and the significant valuation discount versus Toromont (current discount of ~12x on a NTM P/E basis is well above the historical average of 5x-6x). The company has been very active with buybacks through Q4, buying back ~1.9MM shares (~1.2% of shares O/S).

• Toromont Industries Ltd. ("Toromont") – price target +$2 to $123; reiterating Outperform rating: We maintain our positive view on Toromont given: 1) the strong demand trends across Eastern Canada (which have contributed to its record backlog); and, 2) the meaningful optionality available to the company given its clean balance sheet.

• Ritchie Bros. Auctioneers Inc. ("Ritchie Bros.") – price target -US$3 to US$69; Sector Perform rating: While we view the company as a leading marketplace for used equipment, we are maintaining a cautious view given the tight equipment supply backdrop, which could impact results over the near term. We have revised our estimates lower for Q4 2021 to reflect this dynamic.