WSP Global Inc

WSP Global Inc (TSX: WSP) 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 through four reportable segments namely, Canada, Americas, EMEIA, and APAC. 

Key highlights 

• WSP Global Inc. to Acquire Golder: Recently, the company announced that it had entered into an arrangement agreement providing for the acquisition of all issued and outstanding shares of Enterra Holdings Ltd., the holding company of Golder Associates (“Golder”). The company is likely to pay an aggregate cash consideration of approximately CAD 1.5 billion. Through this acquisition, we believe that the company would capitalize on the rapidly growing ESG trends driving demand for environmental services and sustainable infrastructure development. 

• Free cash flow generation: The Company reported a rise in free cash inflow for the nine months ended September 26, 2020, at CAD 470.8 million, compared to CAD 133.5 million in the corresponding period in 2019. Higher free cash flow in 2020 year-to-date was mainly driven by an accelerated collection of costs and anticipated profits in excess of billings and trade receivable accounts.

Source: Company 

• Reduced long term debts: The prudent steps taken by the management helped them to generate higher free cash flows, which help the company in reducing the long-term debts, which is impressive. The company’s debt reduced to CAD 892.3 million from CAD 1,399.7 million at the end of 2019.

Source: Company 

Financial overview of Q3 2020 (in millions of Canadian dollars)

Source: Company 

• In Q3 2020 the Company reported net revenues of CAD1.7 billion, marginally down by 0.4%, compared to the previous corresponding period. Organically, net revenues contracted 3.4% for the quarter. Profitable organic growth in the APAC reportable segment was offset by an organic contraction in the other segments.

• As on September 26, 2020, the Company's backlog stood at CAD 8.5 billion, reaching the record high of 11.6 months of revenues. Backlog increased by CAD 600.1 million or 7.6%, compared to September 28, 2019. Backlog organic growth reached 5.2% on a y-o-y basis.

• In Q3 2020, adjusted EBITDA stood at CAD 297.1 million, up by CAD 8.9 million or 3.1%, compared to CAD 288.2 million in Q3 2019. Adjusted EBITDA margin reached 17.6%, compared to 17.0% in Q3 2019. Lower margins in other segments partially offset improved margins in the APAC and EMEIA reportable segments.

• The reported quarter's net earnings stood at CAD 104.3 million, increased by 11.3%, compared to CAD93.7 million in Q3 2019. 

Region wise Revenue bifurcation

Source: Company

Risks associated with investment

The temporary shutdown of certain construction sites and other restrictive measures globally has resulted in some delayed projects. Further breakout of COVID-19 may result in further delay or cancellation of projects. This could harm the operations and financials of the company. 

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Recently, the Company announced the acquisition of all issued and outstanding shares of Enterra Holdings Ltd., the holding Company of Golder Associates at an approximate price of CAD 1.5 billion. We believe that the Company would capitalize on the rapidly growing ESG trends driving demand for environmental services and sustainable infrastructure development through this acquisition. Furthermore, the backlog, which stands at CAD 8.5 billion, reaching the record high of 11.6 months of revenues, is quite impressive as it reflects a healthy pipeline for future revenue realization. We have valued the stock using EV to Sales based relative valuation and arrived at a low single digit upside (in % terms) potential. Therefore, based on the above rationale and valuation, we recommend a “Watch” stance at the closing price of CAD 123.19 on January 8, 2021. We have considered Toromont Industries Ltd, SNC-Lavalin Group Inc, and Finning International Inc, etc. as the peer group for comparison purpose.

Source: Refinitiv (Thomson Reuters)

Sherritt International Corporation

Sherritt International Corporation (TSX: S) is engaged in the mining and refining of nickel and cobalt from lateritic ores with projects and operations in Canada, Cuba and Madagascar. The Company's segments include Metals, Oil and Gas, Power, and Corporate.

Key Highlights 

• Reduced Debts: The Company completed its balance sheet initiative, which improved its capital structure. As a result of this, total outstanding debt reduced by approximately CAD 301 million, and the group extended the maturities of its note obligations to 2026 and 2029. The group also reduced cash annual interest payments by more than CAD 15 million, which is commendable. 

• Improving Nickel and Cobalt outlook: Themarket fundamentals have improved since the start of Q3 2020 as Nickel and Cobalt's prices have gained 23% and 10% respectively. This recent price momentum is expected to continue into 2021, which is positive for the Company. The Longer-term outlook also remains strong as Nickel demand is likely to grow 3% per year through 2025, while Significant investments from automakers for EV production would further fuel the demand of Nickel and Cobalt.

Source: Company 

• Ample liquidity:As on September 30, 2020, total available liquidity of the company stands at CAD 226.9 million, which is composed of cash, cash equivalents, short-term investments and CAD 61.8 million of available credit facilities. The current liquidity position seems sufficient enough to meet the group’s near-term requirement.

Source: Company 

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the company reported CAD 24.9 million revenue, compared to CAD 27.6 million in the previous corresponding period. The revenue declined as the Company witnessed lower metal production. Finished nickel production totalled 3,750 tonnes, down 9% from 4,139 tonnes produced in Q3 2019 and finished cobalt production was 409 tonnes, down 6% from 436 tonnes produced in Q3 2019.

• The Company posted a loss of CAD 124.7 million from operations in Q3 2020, compared to a loss of only CAD 8.7 million in Q3 2019. The rise in loss from operations was primarily due to impairment of oil assets held in the reported quarter worth CAD 115.6 million.

• Net earnings from continuing operations for Q3 2020 was CAD 11.4 million, compared to a net loss of CAD 15.4 million, in the previous corresponding period. The reported Net earnings include a gain of CAD 143.4 million on the exchange of debentures as part of the balance sheet initiative offset by an impairment loss of CAD 115.6 million. 

Risks associated with investment

The Company's financial performance is mostly dependent on Nickel and Cobalt's price, which directly affects the profitability and cash flow. The prices of metals are subject to volatile price movements. It is affected by numerous factors, such as the strength of the US dollar, demand and supply, interest rates, and inflation rates, all of which are beyond the Company's control. 

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation 

Despite a sloppy economic scenario, the company reaffirmed its production guidance of Nickle to 32,000 tonnes to 33,000 tonnes for FY2020, which is commendable. The company reported a decline in revenue in Q3 2020 as the finished nickel production was down by 9% despite the improvement in Nickel prices, which is something the company needs to address. Increasing cobalt demand from battery makers has helped offset demand softness from other industries, such as the aerospace sector that make extensive use of cobalt as a key component to manufacturing activities as a superalloy. With the recovery of these sectors expected to be slow or delayed, it is anticipated that cobalt market conditions would experience some volatility. The stock soared ~193% in the last three months and outperformed the benchmark index significantly. We have valued the stock using EV to Sales multiple and arrived at double digit downside potential (in % terms). Therefore, based on the above rationale and valuation, we recommend an "Expensive" rating at the closing price of CAD 0.6 as on January 8, 2021. We have considered Altius Minerals Corp, Capstone Mining Corp, Western Areas Ltd etc. as the peer group for comparison purpose.

Source: Refinitiv (Thomson Reuters)

Disclaimer

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