WSP Global Inc. Business as usual
Our view: We reiterate our positive view of WSP Global Inc. ("WSP") following Q3 results that were in line with Street expectations (2024 guidance revised to reflect POWER acquisition). Our focus turns to WSP's upcoming 3-year Strategic Plan (to be released on Feb. 12, followed by Investor Day on Feb. 13), which will provide perspective on the organic and inorganic growth runway ahead, and an updated margin target thorough to year-end 2027. Increasing PT +$18 to $279 and reiterating OP.
Key points:
Thoughts exiting Q3 – WSP is continuing to execute well against the strong demand backdrop (organic NR growth +7.2% YoY, with growth in every region; Adj. EBITDA margin was a record 19.5%, +46bps YoY), while also remaining active on the M&A front (5 acquisitions YTD, adding +4,800 employees). Americas was once again a bright spot this quarter as it relates to organic NR growth (+11.0%), while Canada and EMEIA saw +7.8% and +6.0% growth, respectively (organic backlog growth was -1.7%, mainly due to timing, and +7.7%, driven by the U.K. and Middle East, respectively). The soft spot this quarter was again APAC (+1.0% YoY organic NR growth, -7.5% YoY organic backlog growth), driven by a weak operating backdrop in Asia (organic growth was +2.7% YoY ex. Asia) and subdued market conditions in New Zealand/Australia (management reiterated its confidence in the longer-term outlook in this region). Overall, WSP delivered an in line quarter, and the 2024 guidance revision (largely for the POWER acquisition) was also in line with consensus coming into the quarter (our estimates are largely unchanged).
U.S. once again a bright spot – Americas reported the highest Q3 organic NR growth among WSP's segments at +11.0% YoY, while organic backlog growth was +3.0% YoY. Overall, the infrastructure spending backdrop remains strong in the U.S., with continued support from the various spending programs, which we believe will support top-line growth over the coming years. As it relates to the outcome of the U.S. election, management does not expect any meaningful changes to the infrastructure spending backdrop over the near-term (recall that the IIJA was passed with bipartisan support and that historically WSP has delivered good results in the U.S. under both administrations). On the IRA, while there may be some "reshaping" of the bill (which could be a positive for WSP, in our view, as Engineering/Design work is "front-end loaded"), WSP does not see material risk to the bill being "dismantled" outright (see the note from RBC Capital Markets Analyst, Chris Dendrinos, here for more).
Well-positioned for further M&A – Leverage exiting Q3 was ~1.5x (~2.2x pro-forma the POWER acquisition, which closed Oct. 1; see our note here) vs. WSP's ~1.0x-2.0x target. While we expect the near-term priority to be integrating POWER, we believe WSP remains well positioned to continue rolling up the fragmented Engineering Services industry longer-term, with management highlighting the U.S. and Europe as focus areas.
2024 guidance revised higher largely due to POWER acquisition
WSP's revised 2024 guide (which primarily reflects WSP’s acquisition of POWER Engineers and the expected seasonality of this business) calls for: 1) Net Revenue of $11.8-$12.1 billion (vs. $11.4-$11.8 billion previously); and, 2) Adjusted EBITDA of $2.155-$2.175 billion (vs. $2.1- $2.14 billion previously). As it relates to organic Net Revenue growth by segment, WSP expects +MSD%-HSD% growth in Canada and Americas (unchanged vs. guide at Q4 reporting), +MSD% growth in EMEIA (unchanged), and +LSD% growth in APAC (vs. +MSD% previously). The midpoints of the Net Revenue and Adjusted EBITDA guidance ranges imply an Adjusted EBITDA margin of ~18.1% vs. ~18.3% previously (now reflecting one quarter of POWER acquisition; +49 bps YoY vs. WSP's 2022-2024 target of +30 to +50 bps annually).