Engineering earnings starting - Arcadis first out of the gate; positive organic growth is a surprise (source: NBF April 20, 2021)
Arcadis reported robust Q1/21 results - driven by strong performance in North America, the UK and China / bodes well for the rest of the year and our coverage universe. Net revenue for the quarter came in at €632 mln, implying an organic growth rate of 0.5% (against a positive 3.2% metric in Q1/20; recall COVID-19 impact was largely isolated to China during that time vs. the subsequent 3 quarters of 2020). Operating EBITA improved to €58 mln (vs. €48 mln in Q1/20), resulting in a stronger margin of 9.2% (Q1/20 at 7.2%). On a by-geography basis, North America showed 3.0% organic growth compared to last year, as growth in Infrastructure and Water for public sector clients offset the decline in the private sector. LATAM also posted strong growth driven by infra-related projects in Brazil. The Europe & Middle East segment also posted an organic growth rate of 3.0% in the quarter; in particular, net revenues in the UK were up due to strong growth in Infrastructure, Water and Environment, compensating for a compression in the Buildings sector. APAC region showed an organic contraction of -4.0% as Australia showed some weaknesses due to project award delays (the situation has improved since), offset partially by continued normalization in China. The company also reiterated its strategic priorities for 2021-2023 with key financial objectives such as 1) organic growth of mid-single digit, 2) operating EBITA margin of +10% by 2023 (i.e., EBITDA likely being in 12% range if were to add back depreciation – a more conventional U.S. and CAD peers report), 3) net working capital as a % of revenue at <15%, and 4) DSO at <74 days.
Bottom line – not resetting expectations for our coverage but still quite encouraging. Seasonality guidance for our consulting engineering coverage has been negative organic growth for the upcoming Q1/21 due to tough non-COVID Q1/20 (which is reflected in our and consensus forecasts). The fact that ARDS was able to eke out greater than zero is impressive, with most of the momentum stemming from the U.S., the UK and China. While it’s always difficult to compare companies on one metric alone, we do want to stress that Q1/20 was a time of transition for ARDS whereas the CAD and U.S. peers were firing on all cylinders. Overall, we believe that low single-digit declines are what will end up printing across our coverage. Order intake of 1.1x revenue also bodes well for our companies. Lastly, ARDS’s 2023 financial targets (low single-digit / annum growth, employee turnover of less than 10%, net working capital and leverage) are all suggesting that the engineering consulting business model will perform well over the coming several years, supporting our recent across-the-board multiple expansion exercise as described in our report Q1/21E preview and themes: All about multiple expansion on the back of infra stimulus discussions.