Post by
retiredcf on Apr 23, 2022 10:06am
CIBC
EQUITY RESEARCH
April 20, 2022 Earnings Revision
E&C / Heavy Equipment Q1/22 Preview
WSP, STN, SNC, FTT, TIH, ARE, BDT, NOA, WTE
Our Conclusion
In this report, we provide our Q1/22 preview for the E&C and heavy
equipment sectors and highlight key emerging themes. We have a positive
bias towards STN/WSP (pure-play engineers able to pass through higher
costs at a time of rising backlog/demand levels) and FTT (historic valuation
discount to TIH and a proxy play on elevated crude/copper prices). While we
remain constructive on the mid- to longer-term outlook for Canadian
construction names (ARE/BDT backlog levels set to rise through H1/22), we
expect Q1/22 results (including SNC’s LSTK projects) to be weaker Y/Y due
to ongoing supply chain issues/cost inflation and/or the lack of CEWS.
Key Points
Construction Spending Positive During Periods Of High Inflation: Going
back to 1964, U.S. construction spending growth has generally been positive
during times of sustained high inflation or rising rates.
But What If There Is An Economic Slowdown/Stagflation? While
concerns of an economic recession are growing (not our base case at this
point), historically high E&C backlog levels, increased levels of global public
infrastructure spend (including the multi-year US$1T U.S. plan that kicks in
more meaningfully from H2/22) and pent-up project work due to COVID-19
provide a fundamental cushion for the names in our E&C coverage.
Supply Chain Disruptions Pose Risk To Construction-focused Firms:
As per industry surveys, ~75% of E&C firms indicated project delays and
~79% of firms indicated that supply constraints are having a serious impact.
Engineers Well Positioned To Pass Through High Wage Inflation: The
U.S. engineering unemployment rate has fallen to just 1.8%, and private
sector wage rate growth has risen to 5%. Given high demand for design
services, WSP, STN, and SNC (its engineering segment) are well positioned
to pass on higher costs to clients through higher project pricing (i.e., we
forecast relatively flat margins in 2022 vs. 2021).
Forward Indicators Indicate Demand For Design Services (WSP, STN,
SNC’s Engineering Segment) Remains Strong: Latest Architecture
Billings and Dodge Momentum Index readings suggest continued growth.
CAT Machinery Supply Crunch Improves In Q1/22: CAT’s March 2022
consolidated factory activity rose about 18% vs. a year ago, driven by
off-highway trucks, graders and excavators (a positive development for TIH
and FTT).
Prefer FTT Over TIH On Valuation: Though TIH is arguably more
defensive/less cyclical compared to FTT, the commodity backdrop for oil and
copper remains constructive and, thus, we believe that FTT’s near-historic-
high valuation discount (~11x P/E discount) to TIH is not warranted.
Bird Construction Inc. (Outperformer, $13 Price Target)
Investment Thesis: We expect that record backlog, supported by continued post-pandemic recovery in construction markets and better commodity (oil & gas, mining and agriculture) markets, and increasing cross-selling opportunities from the Stuart Olson and Dagmar acquisitions (as evidenced from recent project awards) should result in strong organic top-line growth in 2022E/2023E. While we continue to believe that the lack of CEWS will be a
headwind in 2022, margins should recover nicely from higher self-perform work and improving project productivity as we look out to 2023. Our price target of $13 and Outperformer rating remain unchanged.
Q1/22 Preview: We forecast Q1/22 adjusted EBITDA of $18.8MM (vs. consensus of $18.3MM), down 11% Y/Y vs. reported Q1/21 results but up 91% Y/Y excluding the $11.2MM in CEWS recorded in Q1/21. We expect BDT to post ~20% top-line growth driven by: 1) the Dagmar acquisition; 2) normalizing project productivity levels (although we still expect some
Omicron-related impact on Q1/22 margins); 3) momentum in industrial/oil & gas-related work (~25% of revenue profile); and, 4) pent-up work for commercial/institutional projects. With Q1/22 results, we will look for an update on BDT’s backlog levels, progress on the integration of Dagmar, and any possible margin impact from cost/labour inflationary pressures.