WSP GLOBAL INC.
A Year Ahead Of 2024 Strategic Plan Targets – Q2/23 Review
Our Conclusion
WSP reported solid Q2/23 results, and raised FY2023 guidance reflecting
both better than previously expected organic net revenue growth and margin
expansion. With the exception of Asia (very small portion of WSP’s business
mix), all core regions are performing very well (U.S. soft backlog is up 40%
Y/Y). With the 2023 guidance raise, WSP will effectively reach its 2022-2024
strategic plan revenue/EBITDA targets (set out in early 2022) one year
ahead of plan. We are raising our forward H2/23 (reflecting WSP’s higher
guidance) and 2024 estimates on better organic growth and margin
assumptions. We are also raising our target multiple by 0.5x to reflect the
improved outlook. Our price target increases to $204 from $191 and we
reaffirm our Outperformer rating.
Key Points
One Year Ahead Of 2022-2024 Strategic Plan Targets: WSP’s current
2022-2024 strategic plan targets net revenue and adj. EBITDA growth of
30% and 40%, respectively, vs. 2021 levels. WSP’s midpoint 2023 guidance
implies net revenue and adj. EBITDA growing 40% and 45%, respectively,
vs. 2021. Since January 2022, WSP has completed and integrated 11
acquisitions (for ~$3B). Along with strong legacy business performance,
these acquisitions have performed better than WSP’s expectations (top line,
margin and cost synergies). WSP’s 2024 adj. EBITDA margin target is
17.5%-18.5% (vs. 2023 midpoint guidance of 17.6%). WSP sees more room
for margin expansion ahead and is confident in its longer-term goal of above
20%.
U.S. Soft Backlog Up 40% Y/Y; Guidance Raise Reflects Better
Performance Across Core Regions: WSP’s 2023 net revenue and adj.
EBITDA guidance raise is a reflection of stronger-than-expected organic
growth, contribution from recent acquisitions, and better-than-expected
margins in H2/23. Management noted that it is seeing better performance
everywhere, with the exception of mainland China (note, Asia represents
less than 3% of WSP’s profitability). Hard backlog of $14.3B is a new record,
and the pipeline of opportunities is very healthy, with WSP noting that U.S.
soft backlog (projects awarded but awaiting funding confirmation) is up ~40%
Y/Y. Management noted it is seeing similar trends globally.
Improved Margin Expansion Visibility: At the midpoint, WSP’s revised
2023 guidance implies an adj. EBITDA margin of 17.6% (prior guidance
implied 17.5%; 2022A of 17.1%). Given that H1/23A margins were up only
~10bps Y/Y, this should imply a nice uptick in margins in H2/23. WSP notes
that productivity improvements should have a significant positive impact to
gross margin, and SG&A optimization efforts should positively contribute as
well to the overall margin profile. Despite persistent wage inflation, labour
turnover rates have fallen by as much as ~500bps Y/Y, and WSP has been
successful in implementing price increases. Also note, H2 seasonally tends
to be stronger than H1 from a margin perspective.