Quebec Conference - SNC and WSP

Transcription

1 June 9, 2017 The NBF Daily Bulletin Industry Comment Engineering & Construction Quebec Conference - SNC and WSP Industry Rating (Capital Goods): Overweight (NBF Economics & Strategy Group) Maxim Sytchev, MSc - (416) maxim.sytchev@nbc.ca Associate: Adam Staszewski (416) adam.staszewski@nbc.ca Coles notes from SNC/WSP presentations today from the Quebec Conference. SNC (Outperform; $70.00 Price Target) while the presentation focused squarely on the company s Mining division, the commentary regarding systems / operational excellence and bidding practices should be viewed in a company-wide (positive) prism. When combined with relatively imminent vote on WS Atkins transactions (June 26), we believe SNC is the most catalyst-driven name under our coverage as concerns around the acquisition have unduly compressed valuation. We believe that the Atkins deal will close on as is basis (the Atkins shares are now trading below SNC s cash offer price); once over this hump, we expect the shares to get back to the pre-m&a discussion level of late Jan 2017 ($ $57.00). Mining commentary also is more robust than we would have thought at this point of the recovery cycle, which provides further support to our investment thesis. Contract structure has shifted but it s cycle-dependent. Diversification of the mining business away from exclusively large projects to sustaining capital (akin to Kentz) has allowed the division to protect its margin profile (6.6% in Q1/17); while at the peak this was a double digit business, the revenue contraction of $1.1 bln vs level is the main culprit; we believe the worst is behind us when it comes to the cycle. Note that even though now 70% of contracts are fixed-price in nature, processing-type contracts and cycle normalization will bring a more balanced mix. Please note that SNC is not looking to do to Ambatovy Nickel Project-type engineering / financing in its future (while the oil & gas division is more ready to take advantage of the company s balance sheet). There also appears to be an opportunity to better leverage Kentz construction capability in the Middle East when undertaking mining work. Rundown on commodities / interesting backlog comment. SNC remains bullish (and we would say more so than six months ago) on copper, gold, non-potash fertilizer, aluminum and lithium. In copper, SNC assumes that demand will outstrip supply by year-end (partly due to work stoppages in Chile; improved copper pricing is also positive for our Finning investment thesis). On gold (C$ and geopolitics are supportive); lower grade projects also require more processing expertise, something that SNC sees as its core competency. There also appears to be opportunities in the aluminum (Middle East) and lithium markets (electrical vehicles) in addition to nickel (Russia) and fertilizers. When combined altogether, SNC envisions the mining backlog to end up at $1 bln by year-end, up from current $450 mln level (we believe this is an incremental data point vs. previous commentary). As mining recovers, management is confident that the company has the internal capacity to manage the projects. Process / execution. The goal for the division is to diversify towards sustaining capital (now 40% of the business); with lean SG&A (and obviously some revenue help) management is comfortable with 7% operating margin (we are modeling 6% next year). The Operational excellence program has been instrumental in the division (combo of culture, hiring, processes, software and focus); one interesting stat SNC now sports a 70% bid/award ratio in the division. WSP (Outperform; $52.00 Price Target) strong execution with macro (no commodity exposure) and positioning (Tier 1 presence in transit and buildings) tailwinds; M&A expectations are becoming more amply reflected in 14.5% ytd share price performance (vs. E&C peers at -8.0%) and 11.3x 2017E EV/EBITDA (8.8x 2018E EV/EBITDA assumes no

2 equity issuance to get to 45,000 headcount level vs. current 36,000). Company s presentation reinforces our view that this is a safe name to own in the Canadian industrial universe. There is still plenty of M&A opportunity (agreed). As the E&C industry continues to consolidate, most of the major North American players (WSP, Aecom, Tetra Tech, Jacobs Engineering, SNC and STN) could be monitoring similar M&A targets (this is a new development given the amount of consolidation we ve seen over the last decade). Despite this, WSP still sees a deep pipeline of targets and does not believe that recent multiple inflation will prevent the company from being a disciplined capital allocator. If one looks at accounting firms (Deloitte boasts almost a 250,000 headcount), this is the likely blueprint for the engineering industry (Aecom is now at the top with 95,000). On capital structure front (net debt / EBITDA at 1.7x now) WSP has greater scope to more efficiently leverage its balance sheet. The US, Australia and the Nordic region are highlighted as potential M&A geographies. US exposure is concentrated in east / western states with relatively meagre central presence. Much of this exposure is on the transit and infra side, while property and water are attractive end-markets. In Australia, the company benefitted greatly from government stimulus propelling growth in the market, particularly in transportation (that being said, we believe turning this business around now recall that when WSP acquired PB it was EBITDA negative - makes the PB transaction a homerun, in our view, given PB s capabilities and current AUS EBITDA contribution). Going forward the property and environment / water sectors are attractive end-markets to expand into. The Nordics have been a (positive) surprise story for the company. Currently WSP is one of the three largest players in the region with double digit growth in recent years as a result of Swedish recovery as well as immigration in the region driving property and transit work. Being one of the larger players in the region does not incentivize larger scale acquisitions (and we also believe that positive GDP growth in Sweden combined with negative interest rates to match ECB creates an inflated dynamic interesting article here). Organic growth guidance increase predicated on continued performance + geopolitical backdrop. WSP s Q1/17 margin improvements, all-time high backlog numbers (up 8.0% y/y and 6% q/q) and impressive 4% organic growth, left us with the impression that organic growth guidance of 1%-4% for 2017E could be increased. While Q1/17 gave the flavor for a guidance bump, WSP remains mindful that when looking at Canada (BC newly elected government creates some uncertainty; QC construction strike), UK (elections tonight), Qatar (Middle East tensions although only 1% of revenue), there is still some uncertainty globally. That being said, the vast majority of the business (especially transit, globally) is undergoing what we view a secular growth spurt, underpinning the company s organic momentum. All-in, we still believe that at least the mid-point of organic growth guide will be upped throughout the year. Technology commitments are necessary to stay ahead of the curve. WSP has been active in identifying and monitoring advances in technology that could be disruptive. On the transit side, WSP has been investing in data collection and digitizing its transit network. Interestingly, the Mouchel acquisition came with smart motorway and transportation intelligence capabilities. Internally, WSP has invested heavily into knowledge connectivity, which allows the co to leverage both its capabilities and people across its divisions.

3 FIGURE 1: SNC NAV EV/EBITDA multiple Core EBITDA* Target ($mln, unless otherw ise noted) 2014A 2015A 2016A 2017E 2018E 2018E Core E&C EBITDA (ex concessions) 7.5x ,104.0 $8,280.3 Minus: Net debt at period-end $1,612.9 Core E&C Equity Value $6,667.4 Shares Outstanding Net Asset Value (ex concessions) $ ETR (DCF-derived, pre-tax) $27.3 Other concession investments (1.5x multiple to account for likely re-rating) $3.9 Net Asset Value $69.66 Current share price $52.87 Potential appreciation - all-inclusive 33.8% *2018E Core E&C EBITDA includes WS Atkins contribution Source: NBF FIGURE 2: WSP NAV EV/EBITDA multiple EBITDA Target ($000's, except per-share data) 2008A 2013A 2014A 2015A 2016A 2017E 2018E 2018E EBITDA 10.0x $171,100 $253,600 $441,500 $498,900 $567,832 $725,306 $7,253,061 Minus: net debt at period-end $1,817,924 Equity value $5,435,137 Shares outstanding 104,140 Net asset value $52.19 Current share price $51.60 Potential appreciation - all-inclusive 4.1% Source: NBF FIGURE 3: Engineering & Construction Comps Local Target Dividend Total % Off 52- Market EPS P/E EBITDA ($mm) EV/EBITDA Ticker Rating Price Price Annual Yield Return w k High Cap (mm) 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E Canadian comps SNC-Lavalin Group Inc. (*) SNC.TO OP % 34% -8% 9, x 7.9x x 5.3x Aecon Group Inc.** ARE.TO OP % 39% -21% x 13.0x x 4.9x Stuart Olson Inc SOX.TO UP % -6% -26% x 11.5x x 5.3x Stantec Inc*** STN.TO OP % 25% -14% 3, x 14.3x x 8.3x IBI Group Inc IBG.TO OP % 37% -8% x 12.4x x 7.9x WSP Global Inc. WSP.TO OP % 4% -1% 5, x 16.3x x 8.8x Bird Construction Inc BDT.TO OP % 53% -43% x 13.6x x 4.2x North American Energy Partners Inc NOA.TO OP % 57% -15% x 12.1x x 3.6x Petrow est Corp PRW.TO SP NM NM 38% -75% NM 9.2x x 5.0x Median 2.5% 37% -15% 18.7x 12.4x 7.0x 5.3x U.S. comps Fluor Corp FLR NR NA % NA -23% 6, x 15.1x , x 5.8x AECOM ACM NR NA % NA -20% 5, x 10.5x x 8.6x Jacobs Engineering Group Inc JEC NR NA % NA -17% 6, x 15.2x x 8.3x KBR Inc KBR NR NA % NA -19% 2, x 10.6x x 7.0x Tutor Perini Corp TPC NR NA % NA -21% 1, x 9.1x x 5.5x Tetra Tech Inc TTEK.O NR NA % NA -2% 2, x 18.3x x 10.4x Chicago Bridge & Iron Company NV CBI NR NA % NA -60% 1, x 3.6x x 4.2x Median 0.6% -20% 11.3x 10.6x 7.1x 7.0x International comps WorleyParsons Ltd WOR.AX NR NA % NA -6% 2, x 31.8x x 10.3x CIMIC Group Ltd CIM.AX NR NA % NA -5% 12, x 30.5x 1, , x 9.0x Amec Foster Wheeler PLC AMFW.L NR 4.95 NA % NA -22% 1, x 9.5x x 9.5x Tecnicas Reunidas SA TRE.MC NR NA % NA -14% 1, x 12.7x x 6.7x Acciona SA ANA.MC NR NA % NA -1% 4, x 17.1x 1, , x 8.2x Saipem SpA SPMI.MI NR 3.46 NA % NA -40% 3, x 17.2x 1, x 5.1x Petrofac Ltd PFC.L NR 3.63 NA % NA -63% 1, x 4.9x x 3.3x Balfour Beatty PLC BALF.L NR 2.75 NA % NA -8% 1, x 14.2x x 9.3x Arcadis NV ARDS.AS NR NA % NA -8% 1, x 11.4x x 8.2x Median 2.8% -8% 17.7x 14.2x 8.9x 8.2x (*) Market cap and 2018E est. include WS Atkins contribution. Trading multiples are adjusted for concession investments, EPS and EBITDA are consolidated numbers. (**) Trading multiples are ex Bermuda airport concession (***) Adjusted for Innovyze divesture Source: NBF, Thomson Reuters, company reports; UP = Underperform; SP = Sector Perform; OP = Outperform

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