All up except for Stifel. GLTA
Desjardins Securities analyst Benoit Poirier sees WSP Global Inc. “back on the M&A track after a year of consolidation.”
“We are pleased with the encouraging 1Q results,” he said. “While it is still early in the year, when analyzing the results, considering management’s comments, adding the acquisition of AKF Group to our numbers and given the potential tailwind of a stronger U.S. dollar (WSP generates 36 per cent of its net revenue from the U.S.), we have high conviction that WSP should be in a position to increase its guidance when it reports 2Q results.”
The Montreal-based professional services firm reported adjusted EBITDA including IFRS 16, which Mr. Poirier calls investors’ main focus, of $446-million, exceeding both his estimate of $438-million and consensus of $440-million. Adjusted EPS, excluding the impact of amortization of intangibles, of $1.55 also came in better than anticipated ($1.46 and $1.47, respectively), despite net revenue of $2.793-billion (up 5 per cent year-over-year), falling in line with expectations ($2.769-billion and $2.759-billlion).
“2024 guidance reaffirmed despite stronger-than-expected 1Q organic growth and the closing of four tuck-ins — we expect an increase with 2Q,” said Mr. Poirier. “WSP confirmed that the migration of its UK division to its new global cloud-based ERP solution was completed at the beginning of 2Q24; with its three largest regions (Canada, the U.S. and the UK) complete, WSP now has more than 70 per cent of its EBITDA or more than 50 per cent of its employees on the new system. For 2024, we now forecast net revenue of $11.8-billion (up from $11.7-billion), with adjusted EBITDA of $2.13-billion (up from $2.10-billion; 18.0-per-cent margin) and adjusted EPS of $7.97 (up from $7.90).
“2023 was a year of consolidation, but management signalled that the M&A faucet would be open once again in 2024. We welcome this return to a more aggressive stance and are confident given WSP’s proactive approach to M&A over the years, which will likely serve as a key competitive advantage in an environment with higher multiple expectations from potential targets. For 2024, we now forecast WSP ending the year with FCF of $861-million and net leverage of 1.1 times, leaving plenty of room for a larger deal (we calculate that WSP should have the balance sheet capacity to potentially acquire up to $3.0-billlion of EV in 2024 without having to issue equity).”
With increases to his revenue and earnings estimates for both 2024 and 2025, Mr. Poirier bumped his target for WSP shares to $246 from $245 after also adding acquisition of AKF Group to his projections, keeping a “buy” rating. The average is $239.71.
“We continue to like the name for many reasons: (1) a disciplined approach to M&A and the ability to take advantage of opportunities that could arise from a potential slowdown; (2) organic growth opportunities; and (3) a push toward a 20-per-cent EBITDA margin in the long term,” he concluded.
Other changes include:
* Stifel’s Ian Gillies to $235 from $245 with a “buy” rating.
“WSP reminds us of Michael Jordan coming out of retirement in 1995,” said Mr. Gillies.. A little break was needed from the game (in this case M&A), but the future outcomes were still titles (accretive M&A). It might look a little different than previous, but we expect a similar outcome (significant EPS accretion aka championships). Our key takeaway from the quarter was that WSP intends to ramp up its well-defined M&A playbook after integrating two very large acquisitions during 2023. We believe this will continue to underpin a premium valuation for the stock, with announcements acting as positive catalysts for the stock later this year. Our target price falls to $235/sh from $245/sh, largely due to below the line tax changes. Despite this reduction, we find our conviction increasing in the stock.”
* ATB Capital Markets’ Chris Murray to $225 from $220 with a “sector perform” rating.
“WSP delivered solid results, as organic growth rates across core regions and margin trends remain intact, with M&A activity beginning to re-accelerate in early 2024. While Company reaffirmed 2024 guidance calling mid-to-high single digit organic growth and further margin expansion, management confirmed that guidance will be revisited in due course to account for recent M&A activity. The backlog provides good visibility for organic growth with the balance sheet supportive for M&A. While WSP delivered solid results and maintained a strong outlook for 2024, we continue to see valuations adequately reflecting the Company’s growth outlook, keeping us neutral on the shares.,” said Mr. Murray.
* Scotia’s Michael Doumet to $241 from $239 with a “sector outperform” rating.
“We view 1Q as an in-line quarter,” said Mr. Doumet. “Relative to our expectations, organic growth and margin expansion were stronger in North America but weaker in EMEIA and APAC. Encouragingly, the Americas (40 per cent of revenues) recorded the highest margin expansion and organic increase to the backlog; and demand trends, aided by the IIJA, should drive optimism for outsized profit growth in this region in 2024. While WSP did not update its 2024 guidance, we believe it remains well-positioned to reach the upper end of its 2024 guidance (before additional M&A) and should be in a position to raise its guidance by 2Q (or 3Q). To us, WSP’s trading multiple, which is at the high end of its historical range despite higher 10YY, embedded higher expectations. With that in mind, while 1Q results suggested that WSP is on track to reach the upper end of its guide, we do not think the quarter was sufficient to raise expectations higher. We view the potential for stronger margin expansion in 2024 and/or additional M&A as catalysts.”
* RBC’s Sabahat Khan to $245 from $237 with an “outperform” rating.