WSP Global Inc.
This company added massively (199%) to its share count between 2012 and 2022 and as such had to grow its earnings and revenues even more massively in order to achieve the very strong per share gains shown here.
Revenue per share growth was particularly strong from 2012 through 2015. Adjusted earnings per share growth has been very strong since 2013 until a modest decline in 2020 due to the pandemic. Growth resumed sharply in 2021 and continued in 2022.
Until recently, the dividend amounted to more that half of the earnings and this has held back growth in book value per share. The dividend has remained unchanged as earnings grew in recent years and recently amounted to 27% of trailing year earnings. Book value was also negatively affected in 2019 by a required change in accounting for leases. Book value per share increased in recent years partly due to share issuances at well above book value.
| WSP Global Inc. (WSP, Toronto) | |
| RESEARCH SUMMARY | |
| Report Author(s): | InvestorsFriend Inc. Analyst(s) |
| Author(s)’ disclosure of share ownership: | The Author(s) hold no shares |
| Based on financials from: | Dec ’22 Y.E. |
| Last updated: | March 20, 2023 |
| Share Price At Date of Last Update: | $ 173.00 |
| Currency: | $ Canadian |
| Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): | Weak Sell / Hold at $173 |
| Qualifies as a stock that could be bought with confidence to hold for 20 years? | Probably, yes |
| Has Wonderful Economics? | Good Economics |
| Has Excellent and Trustworthy Management? | Yes |
| Likely to grow earnings per share at an attractive rate over the next decade? | Yes |
| Positive near-term earnings outlook? | Yes |
| Valuation? | Expensive |
| SUMMARY AND RATING: The graph of revenues per share (red line) shows strong growth until a modest dip with the pandemic of 2020 and then a strong recovery and growth in 2021 and 2022. The graph of adjusted earnings per share (pink line) shows strong growth until 2019 but then a modest decline with the pandemic in 2020 followed by a very strong recovery and growth in 2021 and 2022. The Value ratios based on trailing earnings would suggest a rating of Sell based on a very strong company that is possibly over-valued. Management quality (and particularly their ambition) appears strong. The insider trading signal is moderately negative to neutral. Executive compensation is generous but not a concern. The near-term outlook is quite positive although a recession could lower the outlook. The economics of the business appear to be good. Overall we would rate this as a Weak Sell / Hold. | |
| 0 | |
| LONG TERM VALUE CREATION: A large amount of value has been created for the original shares sold in the IPO at $10 in 2006. However much of WSP’s current share capital was raised fairly recently . It’s ROE has averaged and been fairly steady at about 10% for the ten years ending 2019 but has now risen to 14% which is quite good. Each dollar of invested equity has a book value of $1.17 and trades in the market at a value of $4.21. In addition, dividends have been paid. Overall, the value creation has been quite good. | |
| DESCRIPTION OF BUSINESS: (Updated March 2023) WSP is a growth-by-acquisition company. In recent years, WSP has grown at an enormous rate. The employee count has grown from just 1,600 in 2006 to 66,000 at the end of 2022. The share count increased from 11 million in 2006 to 125 million at the end of 2022. While headquartered and trading in Toronto and reporting in Canadian currency it is truly a global business. Net revenues are sourced as follows (2022 figures): 30% from Europe, the middle east, India and Africa; 36% from the U.S. and Latin America; 18% from Canada, and 16% from Asia, Australia and New Zealand. Project categories (in 2022) are: 47% Transportation and Infrastructure, 21% Property and Buildings, 9% Industry and Energy and 21% Earth and Environment. Clients are 51% public/government and 49% private sector (2022). Engineering and design accounts for two thirds of revenue and “strategic advice” accounts for one third. The company indicates it “exists to future proof our cities and environment”. It is responsible for the engineering and design of a number of extremely large projects including the restoration of the parliament buildings in Canada, major transit projects across the globe, major bridge widenings and construction of huge office towers and much more. They now claim to be the world’s leading environmental and sustainability consulting company with 23,000 experts in the earth & environment sector. They have very strongly embraced the need to transition to a low-carbon world. | |
| ECONOMICS OF THE BUSINESS: The economics of the business appear to be reasonably strong as it sells engineering and related technical services that are not likely to be subject to excessive price competition. In the past four quarters, the company earned a net adjusted earnings profit of 5.8% on revenue. The profit as a percent of assets was 5.8%. The ROE was 11.5% of ending equity as equity was 40% as large as assets. The ROE would be considerably higher if WSP had not paid large premiums in acquisitions. This indicates that the underlying businesses are very profitable. | |
| RISKS: See annual report for a complete list. Risks include the challenges of managing and coordinating a global company with over 550 offices. There are risks associated with cost over-runs on fixed-price (or fixed hours) bids. There could be uninsured liabilities associated with projects. | |
| INSIDER TRADING / INSIDER HOLDING: (Based on March 1, 2022 to March 20, 2022) Major owners the Caisse de dépôt and the Canada Pension Plan each bought a large amount of shares in a private placement in August at $151.75. Apparently no insiders participated int eh public share offering at that time at $151.75. Overall, with the share price now at about $173 and with no very recent sales, the insider trading signal is moderately negative to neutral at best. In terms of insider executive ownership, there is some but not a huge amount and most insiders own more options or performance units than shares. In terms of institutional insider ownership, the Caisse de depot owns about 18% of the shares and the Canada Pension Plan owns about 15% (down from a previous 25%). The insider ownership is a positive indicator. | |
| WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is simple to understand and predict (marginal pass as the business is not complex but its global size adds to complexity), has favorable long-term economics due to cost advantages or superior brand power (pass given past performance and its scale and the fact that customers do not likely choose consultants based on the lowest bid), apparently able and trustworthy management (pass given the track record), a sensible price – below its intrinsic value (probable pass), Other criteria that have been attributed to Buffett include: a low debt ratio (pass given debt at just 37% of the book equity level), good recent profit history (pass) little chance of permanent loss of the investors capital (pass) a low level of maintenance type capital spending required to maintain existing operations excluding growth (pass) | |
| MOST RECENT EARNINGS AND SALES TREND: Adjusted earnings per share growth in the past four quarters, starting with the most recent (Q1 2022) was plus 38%, plus 78%, plus 32%, and plus 26% (some but certainly not all of the growth was in comparison to some weakness during the pandemic). Revenue per share growth in the same four quarters was 24%. 24%, 19% and plus 9% (some of the growth was in comparison to weakness at the height of the pandemic). For the year 2021, adjusted earnings per share were up 42% and revenues per share were up 10%. For the year 2020, adjusted earnings per share were down 6% and revenues per share were down 5%. For the year 2019, adjusted earnings per share were up 14% and revenues per share were up 11%. For the year 2019, adjusted earnings per share rose 14% and revenues per share rose 11%. For the year 2018, adjusted earnings per share rose 16% and revenues per share rose 12%. For the year 2017, adjusted earnings per share rose 7.5% and revenues per share rose 7%. For the year 2016, adjusted earnings per share rose 14% and revenues per share fell 4%. Overall, the most recent trend in revenues and earnings per share has been very positive as the impacts of the pandemic fade. And the longer term trend shows good growth as well. | |
| INDUSTRY SPECIFIC STATISTICS: | |
| Earnings Growth Scenario and Justifiable P/E: The trailing adjusted earnings P/E of 27, given a dividend payout ratio of 28% is pricing in continued good growth such as 10% annually. | |
| VALUE RATIOS: Analysed at a price of $173. The price to book value ratio is perhaps somewhat unattractively high at 3.6 and note that the great majority of its operations were acquired in acquisitions in relatively recent years. Those acquisitions were at significant premiums to book value of the acquired companies. But to date they have made strong earnings despite what they paid for acquisitions. The dividend yield is very modest at 0.9% and represents a payout ratio of 27% of trailing adjusted earnings. The company has no plans to increase the dividend and so the earnings payout ratio is expected to fall as they retain funds for growth. The P/E ratio at 30.1 seems unattractively quite high in isolation. The analyst projected P/E is also high at 29 although it’s not clear if that is on net earnings or adjusted earnings. The return on equity is strong at 13% and would be far higher absent the premiums paid in acquisitions. Average annual earnings per share growth in the five calendar/fiscal years ended 2022 has been quite strong at 13.6%. Intrinsic value is calculated at $116 if we assume 8% annual earnings per share growth for five years followed by a sale at a P/E of 20. And it would be $167 if we assume 12% annual growth (which may be rather optimistic) and that the P/E declines only to 22. It’s certainly possible that earnings could rise at more like 15% annually and the P/E fall only to say 24 in which case out intrinsic value would calculate as $207. But overall these value ratios indicate a strong company that is possibly too expensive indicating a rating of Sell. | |
| TAXATION: Nothing Unusual to note. | |
| SUPPORTING RESEARCH AND ANALYSIS | |
| Symbol and Exchange: | WSP Global Inc. |
| Currency: | $ Canadian |
| Contact: | isabelle.adjahi@wsp.com |
| Web-site: | www.wsp.com |
| INCOME AND PRICE / EARNINGS RATIO ANALYSIS | |
| Latest four quarters annual sales $ millions: | $11,932.9 |
| Latest four quarters annual earnings $ millions: | $431.8 |
| P/E ratio based on latest four quarters earnings: | 48.3 |
| Latest four quarters annual earnings, adjusted, $ millions: | $692.6 |
| BASIS OR SOURCE OF ADJUSTED EARNINGS: Until 2020 we used management’s figure which deducts amortization of purchased intangibles (primarily equivalent to goodwill) and deducts costs to integrate acquisitions. We agree with these adjustments. We also added back $16 million for an unusual income tax expense in late 2017 related to the Trump tax decreases. In 2020, management changed their definition of adjusted earnings to adjust for the volatile impacts of changes in value of “securities related to deferred compensation” and changes in value of derivatives. We agree with this change. But they also ceased adding back the amortization of the value of contract backlogs and customer relationships purchased in acquisition. We will continue to add that back using an estimated value. Interestingly, the company once again started adding that back in 2021. Also added back an unusual lease termination expense in Q4 2019.We used managements figure in 2022 although it may be aggressive by adding back all integration costs and the investment in ERP (Enterprise Resource Plan). | |
| Quality of Earnings Measurement and Persistence: The earnings appear to be high quality as they are largely earned in cash (there is no material amortization of fixed costs). Earnings have been relatively persistent but could fall in recession conditions. The company may be somewhat aggressive in its definition of adjusted earni8ngs since it adds back all acquisition and integrations costs and all expenses of its ERP (enterprise resource management) system. | |
| P/E ratio based on latest four quarters earnings, adjusted | 30.1 |
| Latest fiscal year annual earnings: | $431.8 |
| P/E ratio based on latest fiscal year earnings: | 48.3 |
| Fiscal earnings adjusted: | $692.6 |
| P/E ratio for fiscal earnings adjusted: | 30.1 |
| Latest four quarters profit as percent of sales | 5.8% |
| Dividend Yield: | 0.9% |
| Price / Sales Ratio | 1.75 |
| BALANCE SHEET ITEMS | |
| Price to (diluted) book value ratio: | 3.59 |
| Balance Sheet: Updated as at end of 2022. WSP Global is a service company and not an asset intensive company. Its balance sheet includes very substantial purchased goodwill (and equivalent) assets which is very typical when profitable service companies are purchased. Assets are comprised as follows: 46% is purchased goodwill and another 7% is purchased customer relationships and similar that we consider to be essentially the same as goodwill for a total of 53% goodwill and equivalent. 30% is current receivables including prepaid expenses work in progress not yet billed. 3% is cash and 1% is investments. 7% is capitalized leases. Just 3% is property, plant and equipment including software, 1% is other assets (mostly longer term investments) and 2% is deferred income tax assets. These assets are supported as follows: 40% by common equity, 20.5% by trade and other payables, 7% by prepaid revenue for a total of 27% which largely offsets the receivables and work in progress, 20% by debt, 8% by capitalized lease liabilities (which closely offsets the capitalized lease assets), 1% by retirement benefit obligations, 2% by “provisions” and 1% by deferred income tax liabilities. Assuming that the goodwill is worth at least book value, this is a strong balance sheet with a relatively modest debt level. It is however somewhat surprising / disappointing that the retained earnings represent only 16% of the common equity. | |
| Quality of Net Assets (Book Equity Value) Measurement: (Updated March 2023) As a service company, WSP is very much valued for its earnings and not its assets or net book value. With a recent ROE of about 13%, the net book value does not appear to be over-stated. But the shares trade at 3.6 times book value. | |
| Number of Diluted common shares in millions: | 124.7 |
| Controlling Shareholder: Together, the Caisse and the Canada Pension Plan own about 33% of the company and could be said to control the company in substance if not in form. | |
| Market Equity Capitalization (Value) $ millions: | $21,578.5 |
| Percentage of assets supported by common equity: (remainder is debt or other liabilities) | 40.5% |
| Interest-bearing debt as a percentage of common equity | 49% |
| Current assets / current liabilities: | 1.1 |
| Liquidity and capital structure: With debt at 49% of the book equity level, and with strong cash flows, the liquidity and capital structure are quite strong. In April 2021 they issued 7 year bonds at 2.41% which was indicative of a strong credit rating which was BBB(high). It’s floating rate debt is now at much higher interest rates. | |
| RETURN ON EQUITY AND ON MARKET VALUE | |
| Latest four quarters adjusted (if applicable) net income return on average equity: | 13.0% |
| Latest fiscal year adjusted (if applicable) net income return on average equity: | 13.0% |
| Adjusted (if applicable) latest four quarters return on market capitalization: | 3.2% |
| GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE | |
| 5 years compounded growth in sales/share | 7.9% |
| Volatility of sales growth per share: | Not volatile |
| 5 Years compounded growth in earnings/share | 11.5% |
| 5 years compounded growth in adjusted earnings per share | 14.7% |
| Volatility of earnings growth: | Steady Growth |
| Projected current year earnings $millions: | not available |
| Management projected price to earnings ratio: | not available |
| Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in (adjusted) earnings per share? | Yes |
| Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: | 9.5% |
| More conservative estimate of compounded growth in earnings per share over the forecast period: | 8.0% |
| More optimistic estimate of compounded growth in earnings per share over the forecast period: | 12.0% |
| OUTLOOK AND AMBITIONS FOR BUSINESS: WSP has a strategic long-term ambition of “becoming our industry’s undisputed leader” “and to double in size”. Growth in the most recent quarters was strong and the company is expecting continued strong growth. For 2023 the company expects 15 to 20% growth in adjusted EBITDA which likely means adjusted earnings per share growth higher than that. Higher interest rates are a headwind in 2023. | |
| LONG TERM PREDICTABILITY: WSP seems likely to continue to grow in the long term both organically and through acquisitions. | |
| Estimated present value per share: We calculate $116 if adjusted earnings per share grow for 5 years at the more conservative rate of 8% and the shares can then be sold at a reduced P/E of 20 and $167 if adjusted earnings per share grow at the more optimistic rate of 12% (which may be aggressive) for 5 years and the shares can then be sold at a P/E of 22. Both estimates use an 7.0% required rate of return. | |
| ADDITIONAL COMMENTS | |
| INDUSTRY ATTRACTIVENESS: (These comments reflect the industry and the company’s particular incumbent position within that industry segment.) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests. Barriers to entry (marginal pass as the industry is open for entry but achieving scale would take many years). No issues with powerful suppliers (pass as “suppliers” are primarily the staff). No issues with dependence on powerful customers (pass, as the customer base is diverse), No potential for substitute products (pass, the work needs to be done) No tendency to compete ruinously on price (pass because customers likely would not always select the low-cost bid and with low fixed costs competitors are unlikely to price at a loss). Overall this industry appears to be attractive for a large incumbent. | |
| COMPETITIVE ADVANTAGE: WSP’s advantage lies in its massive scale and its established customer relationships and in the systems it has developed to manage the business. | |
| COMPETITIVE POSITION: (Updated July 2022) The company indicates that it is one of the world’s leading professional service firms. This remains a fragmented industry. We do not have any data indicating what market share WSP has in any country. | |
| RECENT EVENTS: Mostly through acquisitions, they added 11,000 people or 20% to their workforce to end the year 2022 with 66,200 professionals. In early 2023 they completed two small acquisitions. On June 1, 2022 announced its latest huge acquisition adding another 6000 employees in the US, Canada and the UK by acquiring the infrastructure and environmental division of John Wood Group plc. In 2022 there were 5 other smaller acquisitions. In 2022 the company released its latest three year plan calling for additional strong growth. In 2021, WSP has made six acquisitions. In August 2022 issued 6.1 million shares at $151.75 to finance a major acquisition. In January 2021 issued 3 million shares at $93 which was apparently done to finance the Golder acquisition. In June 2020, WSP issued 6.7 million shares at a price of $86. In the spring of 2021 they closed the acquisition of Golder Associates adding 7000 employees (bringing the total then to 54,000) and creating the global leading environmental consulting firm. Previous to June 2020, the latest share issuance had been in September of 2015. | |
| ACCOUNTING AND DISCLOSURE ISSUES: This company has increased its share count by over 10 fold since 2006 in making numerous acquisitions. And the share count is up 199% in the past ten years. Therefore the growth per share is a fraction of the overall growth. Overall, the disclosure was reasonably good and we did not identify any accounting or disclosure concerns. However their definition of adjusted earnings may be aggressive by adding back all acquisition and integration expenses and all ERP Enterprise Resource Plan expenses. The cash income taxes have been materially higher that the accounting taxes and the reason why was not really discussed. | |
| COMMON SHARE STRUCTURE USED: Normal, 1 vote per share | |
| MANAGEMENT QUALITY: We would judge the quality of management to be excellent given the achievement of massive growth by acquisition in this company accompanied by strong growth on a per share basis and a stock price that rose from an issue price of $10 in 2006 to a recent $144 while historically (but not now) paying out a large percentage of earnings as a dividend. Management has been extremely bold in making huge acquisitions. And so far these have worked out very well. | |
| Capital Allocation Skills: We would judge the quality of Capital Allocation to be excellent given the achievement of massive growth by acquisition in this company accompanied by strong growth on a per share basis and a stock price that rose from an issue price of $10 in 2006 to a recent $144. As an Income Trust from 2006 through 2010 the company had a high dividend payout ratio which seems at odds with its growth strategy. However, the high dividends helped insure the stock price was relatively high which allowed acquisitions to be efficiently paid for by issuing stock. | |
| EXECUTIVE COMPENSATION: Compensation appears to be generous but not excessive given the size and the success of the company. Compensation for the five named officers for 2021 ranged from $1.9 million to $9.2 million. | |
| BOARD OF DIRECTORS: Warren Buffett has suggested that ideal Board members be owner-oriented, business-savvy, interested and financially independent. The Board here includes several longer-term members who were key in building the company to its present size as well as a number of new members. There is international representation. Overall, it appears to be as strong Board. | |
| Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, achieved earnings per share growth trend and industry attractiveness. We undertake a relatively detailed analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry. | |
| DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice. | |
| © Copyright: InvestorsFriend Inc. 1999 – 2023. All rights to format and content are reserved. | |