WSP Global Inc.

WSP Global Inc.

(Ignore the 2006 data for revenue ad earnings which was entered as zero because the 2006 data that we had was only for a partial year as the company went public that year)

This company added massively (over 800%) to its share count between 2006 and today and as such had to grow its earnings and revenues massively in order to achieve the per share gains shown here.

Revenue per share growth was particular strong from 2012 through 2015. Adjusted earnings per share growth has been very strong since 2013.

The book value per share grew rapidly from 2006 to 2014. However, this was almost entirely due to the issuance of shares at a premium to book value and not due to the retention of earnings.

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 ’16 Y.E. + Q3 ’17
Last updated: 05-Feb-18
Share Price At Date of Last Update:  $                             58.75
Currency: $ Canadian
Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): Buy at $58.75
SUMMARY AND RATING:  The graph of revenues per share (red line) shows  strong growth. The graph of adjusted earnings per share (pink line) shows strong growth in the past five years. The Value ratios would support a rating of Buy. Management quality (and particularly their ambition) appears strong. The insider trading signal is weak but moderately positive. Executive compensation is reasonable. The outlook seems positive. The economics of the business appear to be reasonably good. Overall we would rate this as a Buy. It’s not a particularly compelling Buy but it will likely do well over the long term.
DESCRIPTION OF BUSINESS: WSP Global Inc. currently provides engineering and related services through 500 offices in 40 countries. WSP is a growth-by-acquisition company. The employee count has grown from 1600 in 2006 to 36,000 in 2017. The share count increased from 11 million in 2006 to 102 million in 2017. While headquartered and trading in Toronto and reporting in Canadian currency it is truly a global business. Revenues are sourced as follows: 37% from Europe, the middle east, India and Africa; 30% from the U.S. and Latin America; 19% from Canada,; and 14% from Asia and Australia. Project categories are: 49% Transportation and Infrastructure, 31% Property and Buildings, 11% Industry and Energy and 9% Environment. The company went public as an Income Trust in 2006 under the name Genivar. It then completed over 60 acquisitions by 2012. It changed to a corporation structure at the start of 2011. The Genivar name had been adopted in 1993 tracing its roots to two Quebec City firms that started in 1959 and that had merged in 1987 and acquired three Montreal firms in 1993. Over 30 acquisitions were made by the time it went public as an Income Trust in 2006. In 2012 it purchased WSP which had 9000 employees and operated in 30 countries. It paid $438 million for the shares of WSP. For comparison Genivar had $501 million in equity at the end of 2011 and 5000 employees. Subsequently it made many more acquisitions. The company reorganized under the name WSP Global Inc. in 2014. WSP  William Sale Partnership had traded in London England since 1987 and had been founded in 1969 but some of its acquisitions traced their history back to 1885 in New York and 1887 in the U.K.
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 profit of 4.6% on revenue. The profit as a percent of assets was 5.0% as revenues are slightly larger than assets. The ROE was 10.6% of ending equity as equity was 47.5% as large as assets.
RISKS: See annual report for a complete list. Risks include the challenges of managing and coordinating a global company with 500 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 July 1, 2017 to February 4, 2018) There was not much insider trading. In part this may be because the company is almost constantly involved in making acquisitions which could restrict insiders from buying due to their insider knowledge of pending transactions. Two directors bought shares (1400 in one case, 1675 in the other) both on August 17, 2017 (one bought on the 18th as well) paying about $50.20 per share. This insider trading signal is weal but moderately positive. The Canada Pension plan, a major owner shuffled some shares between subsidiaries but did not buy additional shares but did collect its dividend in the form of additional shares (DRIP).  In terms of insider ownership, there is some but not a huge amount and most insiders own more options or performance units than shares. The CEO owns about $1.2 million worth of shares. The former CEO owns about $37 million worth of shares. In terms of institutional insider ownership, the Caisse owns about 18% of the shares and the Canada Pension Plan owns about 20%. 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 (pass), Other criteria that have been attributed to Buffett include: a low  debt ratio (pass given debt at 39% 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 three quarters, starting with the most recent was 14%, 11%, and 33%. Revenue per share growth in the same three quarters was 3%, 9% and 8%. For the year 2016, adjusted earnings per share rose 14% and revenues per share fell 4%. Overall, the recent trend in revenues and earnings per share remains strong.
COMPARABLE STORE SALES  OR INDUSTRY SPECIFIC STATISTICS
Earnings Growth Scenario and Justifiable P/E: The P/E of 19.6, given a dividend payout ratio of 50% could be justified with relatively modest annual per share earnings growth of 5% per year for ten years assuming the P/E would drop to a market average of about 17.
VALUE RATIOS: Analysed at a price of $59.43. The price to book value ratio is ostensibly reasonable at 2.1 but note that the great majority of its operations were acquired in acquisitions in relatively recent years. Those acquisitions were at premiums to book value of the acquired companies. Therefore the price to book value here is relatively meaningless but does suggest that we are paying slightly more than double what the company itself paid relatively recently which could be considered a steep premium. The dividend yield is relatively modest at 2.5%. The P/E ratio at 19.6 is moderately unattractively high in isolation. The return on equity is acceptable at 10.75%. Earnings per share growth in the past five years has been strong at 10%. Intrinsic value is calculated at $63 if we assume 8% annual earnings per share growth for five years followed by a sale at a market average P/E of 17. But it would be $87 is we assume 12% annual growth (which may rather optimistic) and that the P/E stays at about 20. Overall these value ratios are not all that compelling but likely justify a rating of Buy.
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: $6,786.3
Latest four quarters annual earnings $ millions: $239.0
P/E ratio based on latest four quarters earnings: 25.1
Latest four quarters annual earnings, adjusted, $ millions: $308.9
BASIS OR SOURCE OF ADJUSTED EARNINGS: We used management’s figure which deducts amortization of purchased intangibles (primarily goodwill) and deducts costs to integrate acquisitions. We agree with these adjustments.
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 persistent but could fall in recession conditions.
P/E ratio based on latest four quarters earnings, adjusted 19.4
Latest fiscal year annual earnings: $199.1
P/E ratio based on latest fiscal year earnings: 30.1
Fiscal earnings adjusted: $271.0
P/E ratio for fiscal earnings adjusted: 22.1
Latest four quarters profit as percent of sales 4.6%
Dividend Yield: 2.6%
Price / Sales Ratio 0.88
BALANCE SHEET ITEMS  
Price to (diluted) book value ratio:                                         2.07
Balance Sheet: Updated Q3 2017. WSP Global is a service company and not an asset intensive company. Its balance sheet includes substantial purchased goodwill which is very typical when profitable service companies are purchased. Assets are comprised as follows: 45% is purchased  goodwill and another 4% is purchased customer relationships and similar that we consider to be essentially the same as goodwill for a total of 49% goodwill and equivalent. 24% is current receivables including prepaid expenses and another 15% is work in progress not yet billed for a total of 39% in current receivables and soon-to-be receivables. Just 5% is property, plant and equipment, 3% is cash, 2% is other assets, 1% is software and 1% is deferred income tax assets. These assets are supported as follows: 48% by common equity, 27% by trade and other receivables, 18% by long-term debt, 3% by retirement benefit obligations, 2% by “provisions” and 1% by deferred income tax liabilities. It is somewhat surprising that the retained earnings represent only 3% of the common equity. In part this is due to the high dividend history given it was an Income Trust from 2006 through 2010. It also results from the fact that the company increased its share count by about 800% since 2006 which resulted in past earnings being small in relation to current equity.
Quality of Net Assets (Book Equity Value) Measurement: 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 11%, the net book value certainly does not appear to be over-stated. But the shares trade at 2.1 times book value.
Number of Diluted common shares in millions:                                 102.8
Controlling Shareholder: Together, the Caisse and the Canada Pension Plan own almost 40% of the company and could be said to control the company in substance if not in form.
Market Equity Capitalization (Value) $ millions: $6,040.4
Percentage of assets supported by common equity: (remainder is debt or other liabilities) 47.5%
Interest-bearing debt as a percentage of common equity 39%
Current assets / current liabilities: 1.4
Liquidity and capital structure: With debt at 39% of the book equity level, the liquidity and capital structure are relatively strong.
RETURN ON EQUITY AND ON MARKET VALUE  
Latest four quarters adjusted (if applicable) net income return on average equity: 10.8%
Latest fiscal year adjusted (if applicable) net income return on average equity: 9.4%
Adjusted (if applicable) latest four quarters return on market capitalization: 5.1%
GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE  
5 years compounded growth in sales/share 20.5%
Volatility of sales growth per share:  $                                  –
5 Years compounded growth in earnings/share 0.7%
5 years compounded growth in adjusted earnings per share 10.4%
Volatility of earnings 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 earnings per share? Good but not great
Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: 4.7%
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 FOR BUSINESS: The short-term outlook seems positive given the state of the world’s economy which has been improving.
LONG TERM PREDICTABILITY: WSP seems likely to continue to grow in the long term
Estimated present value per share: We calculate  $63 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 P/E of 17 and $87 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 20. Both estimates use an 6.5% 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: The company indicates that it is one of the world’s leading professional service firms. This is a fragmented industry. We do not have any data indicating what market share it has in any country.
RECENT EVENTS:
ACCOUNTING AND DISCLOSURE ISSUES: This company has increased its share count by almost 10 fold in making numerous acquisitions. Therefore the growth per share is a fraction of the overall growth. Overall, the disclosure was good and we did not identify any accounting or disclosure concerns.
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 $60 while also paying out half or more of the earnings as a dividend.
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 $60. 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 2016 ranged from $1.5 million to $4.0 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 e 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, earnings 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.
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