CIBCCurrently have a $192.00 target. GLTA
EQUITY RESEARCH
June 1, 2022 Earnings Update
WSP GLOBAL INC.
Another Brilliant Acquisition - John Wood’s Environment /
Infrastructure Consulting Business
Our Conclusion
In our view, the acquisition of John Wood’s Environment and Infrastructure
Consulting business (E&I) is yet another example of a great strategic
acquisition at a reasonable valuation (immediately accretive; financed by
internal cash/debt). The acquisition checks key boxes, namely sector end-
market (Environment), geography (~90% North America, primarily U.S.), and
a strong margin profile (slightly below legacy levels before synergies, but
higher than legacy levels once cost synergies are realized). While our prior
estimates had implicitly baked in acquisition growth, they were not of this
magnitude. We raise our 2022 (assuming the acquisition closes in Q4/22)
and 2023 estimates, and roll out our 2024 estimates. Our price target of $192
is unchanged as our higher estimates offset higher leverage levels. We
maintain our Outperformer rating.
Key Points
Reasonable Valuation For A Quality Business: WSP will acquire E&I for
US$1.810B, including the net present value of US$200MM derived from a
transaction-related tax benefit (tax deductible goodwill; cash benefit for WSP
in future years). The net transaction value of US$1.61B implies a post IFRS-
16 2022E EV/EBITDA multiple of ~12x-13x (pre-synergy) or ~10x-11x (post-
synergy), quite reasonable given E&I’s attractive end markets (Environment/
Water/Infrastructure) and margin profile (above WSP’s legacy business post
synergy). For context, engineering comps are trading at ~12.5x 2022E.
Expanding Leadership Position In Environment / Exposure To U.S.: E&I
adds ~6,000 employees (~11% higher than current WSP levels) and
~$1,050MM in net revenue (~12% above WSP’s prior 2022 net revenue
guidance). WSP’s Earth & Environment business will now make up ~1/3rd of
consolidated results, and E&I enhances WSP’s scale in the Water sector.
Approximately 90% of E&I’s revenues come from North America (U.S. 65%
of mix). The business has strong credentials with Federal and State clients,
as well as a diversified base of Fortune 500 clients (industrial, power, and
manufacturing).
Attractive Base Margin Profile; Cost Synergies To Drive Margins North
Of Exiting Legacy Levels: The 2022E adj. EBITDA margin of the E&I
business on a post IFRS 16 and pre-synergy basis (excluding cost
synergies) is 16%-17%. This compares with WSP’s prior 2022 midpoint
guidance (legacy business) of ~17%. Once the C$38MM in cost synergies
are realized over a 24-month period (i.e., by the end of 2024), the underlying
E&I margin could be well north of WSP’s existing business.
Pro-forma Leverage Within Target Range: The E&I transaction will be fully
financed with debt/cash via a new (US$1.81B) credit facility. At the time of
close (likely in Q4/22), pro-forma net debt / EBITDA will rise to ~2.0x (from
~0.8x as at Q1/22) and WSP sees this ratio declining to 1.6x exiting 2022
(recall Q4 is WSP’s seasonally strongest operating cash generating quarter).