2023-11-01 03:28:07 ET
Summary
- WSP Global has shown strong performance and trades at a reasonable valuation multiple of 26x forward earnings with solid growth prospects.
- The company has been acquiring companies to boost long-term growth and improving profitability with synergies.
- WSP's stability and consistent revenue growth, along with a strong backlog, indicate continued strength and revenue growth in 2024.
WSP Global (WSPOF) ( WSP:CA ) has been a strong performer over the past number of years, as engineer stocks have seen a relative boom period. WSP is an engineering and consulting firm focused on large-scale projects. The company has a global presence, with offices in all continents although it is focused on developed OECD countries. Notably, the company has begun focusing on environmental and water projects, with a large growing market in that area. The company trades at a premium reasonable valuation multiple due to stable revenue growth with strong prospects for the coming years. The company has been active in acquiring companies to boost long-term growth, but also providing strong organic growth from the base business of over 6% for 2023. At an 8% gain year to date, WSP is easily beating the wider TSX index, which is negative, providing stability for shareholders in difficult times.
Stability for 2024
WSP has been consistent in adding revenues inorganically over the past number of years. This led to a strong Q2 F2023 with 31.2% revenue growth over 2022 with a solid 9.3% of that growth being organic. Future orders are determined by the backlog, which in Q2 grew $4.0 billion organically - the highest WSP has had in a quarter. This shows the business is seeing strength before the new acquisitions come into the picture, and 2024 should continue revenue growth. John Wood Group was the biggest acquisition of the past year at a total cost of approximately CAD2.1B in September 2022. That business is providing over $1.05B in revenue at a reasonable multiple of 11.5x EBITDA after expected synergies. Since WSP is trading at 17x EBITDA, this was a reasonable price to develop its position in the global water consultancy sector. Despite the acquisition above, net debt is still quite reasonable at 1.9x EBITDA which is up a bit from 2022. The company has kept it at this level maximum in the past decade, so expect 2024 to have a slower cadence of acquisitions as the company digests and integrates the recent acquisitions. The 11 acquisitions of $3 billion since the start of 2022 have given the company a considerable amount of work to do with integration but WSP are experts in this area.
Total backlog is up to $14.3 Billion, giving strong visibility into 2024 revenues and continued earnings growth. The company also called out its 'soft backlog ' in the United States is up 20% since the start of 2023, which is contract awarded. These are projects that are already won, but just require funding to be confirmed by the other party before they move to the official backlog. 40% growth y/y in that metric shows the company should see continued growth of backlog into 2024 and beyond. Margins have been improving with 16.9% EBITDA margin up 0.2% over Q2 2022 margin, as scale continues to benefit earnings power. The company is expecting 17.6% EBITDA margin for the full year, so margins will continue to improve as the benefits of scale are mounting. Employee turnover continues to decrease, which is also going to benefit margins in the longer term from lower onboarding and wage costs. The goal for the next 1.5 years is 18.5% margin on the high end, which should help boost the stock over the coming year as all indications are they can achieve this.
The shares have recently pulled back CAD15 from all-time highs to $181, as the market swoon has hit industrial stocks. This provides a good entry point, as a company with stable revenues heading into 2024 will continue to trade at a premium valuation. The market continues to focus on earnings power and companies with little possible downside to 2024 numbers. As you can see below, forward earnings multiple is around its average over the past 3 years at 26x. At these levels in recent years, the stock has actually seen some multiple expansion, supported by growing equity. Shareholder equity has grown from CAD3.5 Billion to CAD6.1B over the past 3 years with strong profitability flowing through to increased assets. Net income has increased from $300m prior to the pandemic to over $510m over the last 12 months and climbing, supporting the growth of shares. This year the 6-9% expected organic growth would be the best or second-best year since 2009 - a very strong result considering the macroeconomic climate.
WSP - A buy on recent weakness
WSP is a stable growth stock fueled by organic and inorganic growth over the long term. The stock trades at a Beta of only 0.89 against the market recently, showing its relative resilience in the face of recent volatility. Combined with a growing dividend of 0.86% the stock is a great option for those looking for growth at the right price stock for 2024. The sector continues to be supported by long-term infrastructure projects and stable government spending in OECD countries. This continued strong performance in both revenue growth, backlog conversion, and margins will fuel a continued outperformance of the wider TSX market. All the while being less volatile, as the revenues are booked in advance with projects taking many months to years to complete. Considering all this, I think WSP Global is buy-rated at the current price of $181 for any investor looking to add stable and safe growth to their portfolios for 2024.
For further details see:
WSP Global: Stability And Growth Expected In 2024