Focus On M&A – Q1/24 Review Our Conclusion
WSP reported a slight Q1/24 beat, reflecting positive organic growth across
all regional units, and continued strong margin execution. The company is
sitting on near-record backlog levels (supporting mid-to-high single-digit
organic growth in FY2024). Following a year of consolidation/integration in
2023 (E&I and Golder) and ~70% of the new ERP now rolled out, the focus
now turns to M&A-driven top-line growth. YTD, WSP has completed four
small but strategic acquisitions (~1% of employee base). Depending on
WSP’s ability to make tactical mid- to larger-sized acquisitions near term, we
could see WSP raise 2024 guidance later this year. Our FY2024 and FY2025
estimates are largely unchanged at this point. We reaffirm our $239 price
target and Outperformer rating.
Key Points
2023 A Year Of Consolidation; 2024 A Year For M&A? YTD 2024, WSP
has made four acquisitions, adding ~1% to its employee base, with WSP
noting that the margin on these is similar to its own (room to improve with
integration). Looking ahead, the M&A pipeline (including medium and large
targets) is healthy. WSP notes that it is encouraged by the M&A discussions
that are ongoing, adding that all the ingredients are in place for increased
activity. The balance sheet is healthy (1.6x net debt/adj. EBITDA), the
integration of the large E&I and Golder acquisitions (12k+ employees) is
done, and the ERP has been rolled out across the majority of the business.
Continued Margin Enhancement; New ERP ~70% Complete: Building on
solid 2023 performance, WSP delivered a ~50bps Y/Y improvement in adj.
EBITDA margin in Q1/24 driven by productivity (as evidenced by a reduction
in personnel costs as a percentage of net revenues). WSP remains focused
on delivering further efficiency gains, and is confident of delivering the
~65bps FY2024 Y/Y margin improvement embedded in guidance. The new
ERP system has been rolled out across ~70% of the business (U.S., Canada
and U.K.), with the remaining ~30% across other regions to be complete by
2025.
Near-record Backlog; Solid Organic Backlog Growth In Americas;
Canada Dip Temporary: Backlog of $14.2B (11.8 months of revenue)
increased ~1% Q/Q (~1% organic) and ~3% Y/Y (~5% organic). WSP is
seeing strong organic backlog growth in the Americas (double-digit Y/Y
growth; broad based across sectors) and EMEIA. In the U.S., WSP is very
well positioned given ~40% of IIJA funds have now been disbursed, of which
two-thirds are transportation-related (WSP is a leader in U.S. rail/transit). The
decline in Canada backlog is timing related, with underlying fundamentals
solid. The decline in APAC is due to a pause in New Zealand infrastructure
spending with the new government (but this should reverse in due course)
and timing of projects in Australia