EQUITY RESEARCH
July 10, 2024 Earnings Revision
Summer 2024 Engineering, Construction &
Heavy Equipment Outlook
WSP, STN, ATRL, FTT, TIH, ARE, BDT, NOA, WTE
Our Conclusion
While we remain constructive on the Engineers (ATRL, STN, WSP) given the
positive business/operating backdrop, ATRL remains our top pick. We
believe there is room for expansion in its multiple as ATRL makes further
progress on solid organic growth, LSTK construction backlog is reduced and
underlying FCF improves. We continue to prefer FTT over TIH (on
valuation). FTT should see a stronger H2/24, supported by a constructive
new equipment outlook (Chile copper) and improved visibility into a recovery
in product support growth in H2/24 (Canada/U.K.).
Key Points
U.S. Infrastructure A Tailwind For H2/24 And 2025: We expect the U.S. to
remain a top contributor globally to organic revenue growth for STN (U.S. is
~55% of sales), WSP (~40%) and ATRL (~20%). In ENR’s July 2024 survey,
~86% of U.S. design firms foresee the design market as stable/improving
over the next 12 to 18 months. While IIJA projects have been slow to roll out
at the state/municipal level, we are seeing signs of improvement and expect
a ramp-up over H2/24 and H1/25, providing a tailwind for engineering/design
firms (which are at the front end of the construction lifecycle).
Constructive Engineering Margin Outlook Given Pricing Power,
Moderating Wage Pressure And Improved Productivity: ATRL’s
Engineering Services segment, WSP and STN are targeting a 2024 adjusted
EBITDA margin improvement of ~100 bps, ~65 bps and ~30 bps,
respectively (at the mid-point of guidance) vs. 2023. While unemployment
rates in key regions such as the U.S. remain below average, importantly,
volunteer turnover rates have returned to pre-pandemic levels. Combined
with pricing power and productivity initiatives, margins should continue to
track higher.
Solid Equipment Backlog Levels Provide Good Near-term Visibility:
FTT’s pro forma Q1/24 equipment backlog of ~$2.7B (including the
>$700MM in new equipment orders received in April) would be similar to the
record Q1/23 level of ~$2.7B. TIH’s Q1/24 backlog of $1.4B is up 24% Y/Y.
According to consensus estimates for major mining firms, total capex is set
to increase ~9% Y/Y in 2024. Meanwhile, the Canadian construction market
remains healthy. Rolling three-month average Canada non-residential
building permits are up ~5% M/M and Y/Y as of April 2024.
Modest Margin Pressure From Normalized Supply Chain/Equipment
Availability: We continue to expect a normalized supply chain (greater
competition) to modestly pressure margins for FTT/TIH. Using the U.S. as a
proxy, used equipment values of off-highway trucks, dozers, excavators and
wheel loaders declined between 7%-11% Y/Y in May 2024. We forecast
FTT’s and TIH’s 2024 EBITDA margins to compress by ~90 bps and
~80 bps, respectively, vs. 2023 levels. AtkinsRalis (Outperformer; $68 Price Target)
Our Conclusion: Recall, ATRL held its 2024 Investor Day in Toronto on June 13, at which
the company introduced its fresh three-year (2025-2027) targets and its intention to sell its
interest in Highway 407 before the end of 2027. We viewed the update as a positive one,
highlighting expectations for strong organic revenue growth, overall margin expansion and
improved FCF generation (allowing for M&A and future capital returns to shareholders). After
years of negative FCF, ATRL is set to generate positive FCF (>$200MM in 2024 and
>$400MM in 2025 per our estimates). With leverage under 2x, we could see additional upside to our estimates from tuck-in M&A from H2/24 onwards. Despite the stock being up ~36% YTD, ATRL is trading at an implied 2025E E&C EV/EBITDA multiple of ~9.5x on our
estimates (well below peers). We maintain our $68 price target and Outperformer rating.
Q2/24 Preview: As shown in the table in Exhibit 16, we forecast ATRL to report Q2/24
adjusted E&C EBITDA of $202MM (vs. consensus of $198MM), up ~21% Y/Y. We assume
Services EBIT is up ~21% Y/Y, driven by ~12% revenue growth (mostly organic) and ~70 bps of Y/Y EBIT margin expansion. We expect an LSTK Projects EBIT loss of ~$10MM, in line with the company’s messaging. Our focus for Q2/24 reporting will be on ATRL’s Services
backlog trends (recall, Q1/24 was a record level) and 2024 guidance (recall, ATRL raised its
Nuclear guidance but left Engineering Services Regions guidance unchanged with Q1/24
results). We will also be looking for evidence of further reduction of the remaining
troublesome Ontario LRT construction backlog (and timeline)