We hosted Alain Michaud, Chief Financial Officer, and Quentin Weber, Director, Investor Relations, at day one of RBC's Global Industrials Conference. Overall, our discussion highlighted the revenue synergy opportunity from the POWER acquisition, the company's updated views on achieving a 20% Adjusted EBITDA margin, and that M&A remains WSP's core capital allocation priority going forward. We rate WSP Outperform with a $261 price target.
We highlight key takeaways from our discussion:
Revenue synergies are the real opportunity from the POWER acquisition – Having agreed to acquire POWER Engineers ("POWER") for US$1.78B last month, our discussion highlighted that the more meaningful opportunity for WSP coming out of this acquisition is on the revenue synergy front. With the asset now within WSP's umbrella, management believes POWER will be able to broaden its scope of clients at a moment where the demand outlook is very positive as the ways in which the U.S. produces and consumes energy is rapidly evolving. For perspective, POWER's current client base is largely driven by large U.S. utilities, while WSP has relationships with major customers across a wide variety of end markets and geographies (i.e., there appear to be plenty of cross- selling opportunities for POWER under WSP's banner). Our view is that the revenue synergies could well exceed the cost synergies ($25MM) detailed by the company.
Coming closer to achieving the 20% Adjusted EBITDA margin target – Whereas management previously considered a margin of +20% a "longer-term" aspiration (for context, WSP is guiding to an Adjusted EBITDA margin of ~18.3% at the midpoint of its latest 2024 guidance ranges), our discussion today highlighted that management believes this could now be a reasonable goal over the medium term (our read is achieving this range within the next 3-year cycle is possible). In terms of levers to achieve this goal, our discussion highlighted utilization (a 1% increase in utilization company-wide results in a ~1% lift to margins), the company's ongoing ERP deployment (~75% completed and already rolled out across the U.S., Canada, and the U.K.; full roll-out to be completed by 2026), continued progress on the company's various digital initiatives, and increasingly leveraging the company's offshore engineering offices to deliver work cost-effectively (for perspective, ~6% of WSP's work is completed in the company's offshore offices, with runway for a higher penetration).
Balance sheet well-positioned, M&A still the priority on capital allocation – M&A remains WSP's primary capital allocation priority, with management highlighting that the Engineering Services market remains highly fragmented (we note leverage is ~2.2x on a pro-forma basis for the POWER acquisition). In terms of key targets for expansion, management believes WSP is still "sub- scale" across a number of geographies, including the U.S. (even after the POWER transaction), Europe (noting management wants WSP to be a top-3 player in each market in which it operates) and Australia (this market is similar in size to Canada but WSP has a meaningfully smaller presence in Australia).