WSP Global Inc. is “(accretively) cementing [its] leadership position in Environment & Water” with the US$1.8-billion acquisition of John Wood Group PLC’s environment business, said National Bank Financial analyst Maxim Sytchev.
Shares of the Canadian engineering giant jumped almost 5 per cent on Wednesday following the premarket announcement of a definitive agreement to take over a business known as Environment & Infrastructure (E&I) from Aberdeen, Scotland-based Wood.
“Pro-forma, WSP’s absolute dollar generation at US$3.9-billion in this critical vertical will dwarf that of Aecom’s (#2 player with US$2.6-billion),” said Mr. Sytchev. “Management continues to execute on its strategy in a steady, capital-savvy manner, providing a reprieve in this tumultuous market. The transaction should act as a catalyst to differentiate the company’s shares vs. other peers who have seen their multiples compress due to higher discount rates. The transaction is projected to be 11-per-cent accretive on EPS in 2024 (based on our numbers and in line with its commentary), sets in motion the 2024 strategic plan while demonstrating to the market that WSP can be transactional in good and bad markets.”
Mr. Sytchev sees little chance of regulatory obstacles or a competing offer emerging, citing “the global and highly fragmented nature of the engineering consulting industry.”
WSP is acquiring the assets at 11.5 times pro-forma synergies (on 2022 estimates, compared to own multiple of 14.8 times — ex IFRS),” he said. “C$1.05 bln top line (US$830-million in water vertical) will put WSP on the path to reaching $10-billion top-line goal by 2024; The EBITDA run rate of $140-million (pre-synergies) and $177-million post (17-per-cent EBITDA margin) doesn’t hurt either. Note that multiples (as is typically the case) are calculated excluding US$200-million of present value pertaining to a transaction-related tax benefit.”
Maintaining an “outperform” rating for WSP shares, Mr. Sytchev raised his target to $182 from $180. The average is $177.07.
Elsewhere, other analysts making target adjustments include:
* Desjardins Securities’ Benoit Poirier to $184 from $177 with a “buy” rating.
“The John Wood E&I business acquisition checks many boxes for WSP and strengthens its foothold in North America, specifically the U.S.,” he said. “This structural change should continue to drive business for the consulting sector for years to come. We derive adjusted EPS accretion of 11 per cent in 2024, although there is likely more upside as WSP realizes cross-selling opportunities along the way. We reiterate our bullish stance.”
* Canaccord Genuity’s Yuri Lynk lowered his target to $190 from $200, reiterating a “buy” rating.
“The acquisition aligns with WSP’s 2022-2024 strategic plan as it continues to build the company’s exposure to the rapidly growing environmental services market, particularly in the U.S.,” said Mr. Lynk. “The acquisition is 12-per-cent and 8-per-cent accretive to our 2023 EBITDA and EPS estimates and is expected to drive mid-teen EPS accretion in 2024, once synergies are fully realized. With its strong balance sheet and significant revenue cross-selling potential excluded from our forecasts, we believe WSP, currently trading in line with peers at 14 times 2023 estimated EBITDA, deserves to trade at a premium.”
* Scotia Capital’s Mark Neville to $175 from $170 with a “sector perform” rating.
“We like the industrial logic of the deal as it (i.) significantly scales WSP’s business in high-growth markets (i.e., Energy & Environment, Water, etc.) that should have long tails to growth driven by the push to net zero, (ii.) adds a highly complementary (and long-standing) customer base (e.g., U.S. federal, Fortune 500 industrial co.’s, etc.) that should provide for revenue synergy opportunities (that are not factored into synergy guidance), and (iii.) makes for a more balanced mix of business, across/within end-markets, geographies, and customer base,” said Mr. Neville. “While the acquisition wasn’t cheap (i.e., we estimate the transaction multiple to be at an approximate 3-multiple-point premium to Golder), it is still accretive.”