The engineering sector is having a good year. SNC is not alone in this. Lets keep it simple and look at organic revenue growth (defined as excluding growth through acquisition and excluding the impact of foreign exchange) and the margin (adjusted EBITDA / Net Revenue) for SNC, WSP and Stantec for FY 2022 and 2023:
| | Q1 22 | Q2 22 | Q3 22 | Q4 22 | 2022 | Q1 23 | Q2 23 | Q3 23 | Q4 23 | 2023E |
| Organic Revenue Growth | | | | | | | | | | |
| SNC | 8.4% | 6.0% | 12.6% | 1.1% | 6.8% | 11.5% | 17.7% | 19.5% | - | 16.0% |
| WSP | 12.7% | 5.0% | 8.2% | 4.8% | 7.3% | 8.6% | 9.3% | 6.7% | - | 7.5% |
| STN | 6.4% | 9.4% | 11.0% | 10.6% | 9.4% | 12.2% | 11.2% | 9.0% | - | 13.0% |
| Adj EBITDA/Net Revenue | | | | | | | | | | |
| SNC | 13.0% | 15.0% | 14.5% | 16.0% | 14.6% | 14.0% | 13.7% | 14.3% | - | 14.5% |
| WSP | 15.5% | 16.7% | 17.2% | 17.5% | 17.1% | 12.2% | 16.9% | 19.1% | - | 17.7% |
| STN | 14.5% | 16.7% | 16.7% | 17.0% | 16.2% | 14.6% | 16.9% | 18.3% | - | 16.9% |
We don't have Q4/23 yet, but all three gave guidance for the full year 2023 this week and I've used the mid-point for this comparison. As you can see, both WSP and STN have achieved 60 to 70 bps in margin improvement this year, but STN has also achieved a nice jump in organic revenue growth. Not surprising that STN stock is +45% YTD vs WSP +20%.
As far as SNC goes, margins remained more or less the same and in-line with their previous guidance. Revenue on the other hand has surged, particularly in the last two quarters and 2023 guidance was bumped up twice now, from up 4% to 6% at the beginning of the year to +15% to 17% now. They have the best revenue growth of the three. The question now, is this a new revenue base-line or is this just going to be a tougher comp in 2024? Management didn't offer much clarification on this. I suspect they are almost as surprised as I was at what they achieved. The analysts also probed on wether they could see any margin improvement going forward to close the gap with their competitors, and they indicated that they were happy with the margins, so I don't expect much improvement there in the near-term.
So basically we've got very nice revenue growth, but not much visibility on how sustainable it is, and somewhat inferior margins. This is more than offset by a cheaper valuation. I will be curious to see the range of analyst estimates on 2024 revenues, but being conservative, we can say that ex-concessions, SNC is trading in the 9.3x range of 2024 EV/EBITDA. WSP trades at 13.2x and STN the best performer operationally, trades at 13.6x.
The analysts will continue to raise their targets and we will probably trade closer to a 10.0x to 10.5x multiple all else being equal, somewhere in the $48 to $50 range. I probably continue to trim above $47. But there is a path to $55+ on this name. Remember, management has suggested they would like to get to a 80% to 90% free cash flow conersion ratio (FCF / Net Income) by the end of 2024. That makes 2025 very interesting if you are generating north of $400mm in free cash flow. The remaining recourse debt can be eliminated fairly quickly and we are off to the races.