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WSP (WSP) Stock | TSX: WSP.TO

Covered by Stratosphere

Engineering a Roll-Up Strategy

WSP Global Inc. provides engineering and design services to clients in the Transportation & Infrastructure, Property and Buildings, Environment, Power and Energy, Resources, and Industry sectors. It also offers strategic advisory services.

The firm operates in four main regions: Canada, the Americas (US and Latin America), EMEIA (Europe, Middle East, India and Africa), and APAC (Asia Pacific, which includes Australia, New Zealand and much of continental Asia).

Stratosphere Score

8

Growth

4

Valuation

10

Quality

5

Margins

7

Dividend

2

Balance Sheet

7

Investment Thesis

  1. WSP Global is executing a roll-up strategy of the highly fragmented engineering and professional services firms globally.

  2. Acquisitions in professional services provide excellent synergy and opportunity for cross-selling as the mothership firm expands capabilities across different verticals.

  3. WSP can benefit from the strong demand for infrastructure globally.

  4. Providing just professional services, WSP exists in the capital-light side of the infrastructure value chain meaning the business spits out significant free cash flow to fuel further acquisitions.

  5. WSP is well positioned to grow in the environmental services sector completing large acquisitions of environmental engineering firm, Golder Associates.

  6. Its prolific M&A of over 180 companies has demonstrated an ability to deploy capital at scale and consistently boost cash flows with a compounded annual growth rate ("CAGR") of over 30% on free cash flow.

Key Company Metrics

A set of metrics we constantly keep updated to monitor the investment thesis.

Competitive Advantages

Human Capital

As WSP is already a company known worldwide, it plans to expand its business even further in order solidify its name as the leading global engineering firm. It all starts with building a strategic plan centered around its clients.

The three main pillars of this plan are people & culture, expertise, and operational excellence. The main emphasis for WSP is putting clients first. The company's ideology revolves around building and nurturing long lasting rapports that will carry on for decades and beyond.

WSP also successfully fosters a competitive yet friendly work environment for employees. This helps ensure employees are inclined to help clients and help them succeed.

Being a large multinational company comes with clear advantages.

For one, employees can work in essentially any continent around the world. This level of flexibility is not granted at many companies. Second, WSP offers a plethora of competitive benefits that help employees will secure and valued.

WSP's expertise in the engineering space is unmatched. Once again, it comes down to its people. WSP hires lead engineers and consultants who are exceptional in their respective fields. Attracting and obtaining the best-of-the-best talent ensures WSP is able to take on the most complex projects while adhering to a high standard of quality. As a firm selling professional services, having highly talented and capable individuals is the grandest key to success.

This leads to the culminating factor to WSP's success - operational excellence. A well-run company structure with high operational standards and industry-leading margins creates strong demand for its services. Customer demand, therefore, remains high and increased investments into such an environment create enormous value for the company and shareholders.

The Endless Cycle

One benefit of using the roll-up strategy is it allows companies to combine their assets and resources into one large pool. In WSP's case, buying out smaller companies allows them to take over the previous companies' resources, such as workers, products, services, customers, and use them for WSP's benefit.

This helps to widen WSP's scope of services as they are able to deliver on a greater variety of client needs, potentially including those in micro niches. It also enables the company to cross-sell other engineering services to existing customers. Prospective clients can also be upsold if, unbeknownst to the clients, WSP has more services than they had originally thought or approached WSP for.

The roll-up strategy also incurs lower production and operation costs while also increasing revenue. As WSP can buy out smaller companies, its cost of production will not increase much as it quickly realizes profit-boosting expense synergies through its efficient, systematic acquisition and integration process.

After all, each new acquisition is theoretically easier and smoother than the last, unless the newest acquisition has certain operational, financial, or regulatory nuances to it that management has not yet come across with previous acquisitions. This can then be used to generate more revenue.

Lastly, WSP can create value quite literally out of thin air. The engineering realm requires a ton of expertise and training, and so many of the largest global corporations and investment management companies stay away from acquiring these sorts of companies. WSP can roll up these niche engineering businesses under its name for a decent valuation multiple. Once integrated under the WSP name, those earnings are generally "re-rated" to WSP's public market valuation, creating value instantly. This is known as multiple arbitrage, a fascinating concept that we explore through several serial acquirers on Stratosphere.

All in all, WSP leverages the roll-up strategy to win projects and win in its markets. The construction and engineering industries are highly fragmented with many local players. WSP has been able to scale and expand its margins through its growing reach. As the company grows, it generates more free cash that can be used for reinvestment and acquisitions. This is the concept of the "endless cycle" that has been propelling WSP upwards.

WSP Flywheel

Opportunities Ahead

  • Any successful roll-up strategy requires prolific M&A (mergers and acquisitions) conducted frequently and in a systematic manner. From its roots, WSP Global has acquired an impressive number of companies to expand its business into many countries and niche industries. The company has acquired over 180 companies to get to its current scale and scope it delivers on today. WSP has a long runway in these industries as these markets have many competitors in a highly fragmented market. WSP will continue acquiring companies because of its strong financial position and globally recognized and reputable brand name.

  • WSP’s leading position in sustainable and renewable infrastructure and assets will set the company up for long-term success. There is no doubt the focus on ESG (i.e., environmental, social, and governance) factors are of growing importance in today's world. WSP is directly involved with projects that affect the environment, so its diligence in this area should pay dividends in the future, figurately and literally. Trends like growing infrastructure spending, decarbonization of the economy, ESG, and digitalization provide an ample runway for a forward-thinking engineering firm like WSP.

  • WSP's successes in helping build the infrastructure we need to advance the world will pay off financially. Management believes it can grow revenues organically between 5-10% through 2024 and deliver on EBITDA margins north of 20%. These organic growth and margin expansion efforts would help free up as much cash as possible for WSP to also conduct more frequent and / or larger acquisitions. This is the "endless cycle" in practice, and we think WSP will continue to leverage it well.

Risks

  • The biggest risk with WSP is its reliance on mergers and acquisitions to grow. Despite having previous acquisitions that helped to further strengthen the company, there may be some that hurt the company more, especially if valuations rise to levels well above the historical range in which WSP worked.

  • There is little organic growth. Perhaps the predicted strong demand for infrastructure coming may boost organic growth.

  • If WSP overpays for engineering firms, incremental ROIC (i.e., return on invested capital) could be lowered substantially, which reduces ROIC over the long run and hurts WSP's reinvestment capabilities. As the company is starting to buy out larger companies, it should ensure it continues to operate with immense discipline and abide by stringent M&A criteria so as to not allocate capital in a value-destroying manner.

  • WSP should also ensure each company acquired by WSP meets a high standard of quality. If valuations rise, WSP may move down the "quality curve" and purchase lower quality companies that were identified as good targets but turn out to be poor. WSP's ability to provide quality services with some of the best professionals in the engineering world is an image that it must protect at all costs.

  • Reputation is everything for WSP. Without its reputation and reliability in the professional engineering services, WSP could set itself up for disaster. We strongly urge investors to constantly monitor how new acquisitions impact margins, free cash flow, and ROIC.

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