Stantec Inc.

Stantec Inc. (TSX: STN) is a global engineering and construction firm which provides services like engineering, architecture, interior design, landscape architecture, surveying, etc., primarily in the North American region.

Key Highlights:

• Strong Free Cash Flow Generation: The company has shown robust free cash flow generation in the recent few quarters amidst the current economic turmoil, supported by improved cash from operations. A higher cash flow is a key positive as it indicates improved financial flexibility.                                  

Source: Company Presentation

• New Order Win: Recently, the group reported a new order from The Regional Transportation Commission (RTC) of Southern Nevada for implementation of the GoMed Program. This is an advanced mobility program which would include planning and implementation for the seamless integration of autonomous vehicles (AVs), connected technologies, traffic and data management, and user software interface. The above implementation is intended to provide a hassle-free and accessible mobility solution for patients and staff and is applied to the 674-acre cluster of hospitals, clinics, and the University of Nevada.

• Improved Backlog: At the end of Q1FY21, the group reported a higher backlog of CAD 4,607.4 million compared to CAD 4,377.1 million in Q4FY20, reflecting a growth of 5.3%. The increment was driven by organic growth from the Canada and US operations coupled with improved performance from the Energy & Resources and Environmental Services. Notably, these backlogs denote almost twelve months of income.

Source: Company Report

Q1FY21 Financial Highlights:

• STN disclosed its first quarter result, wherein the company reported net revenue of CAD 878.7 million, declined from CAD 955.2 million in the previous corresponding period (pcp). The slide was primarily attributable to lower income from the Buildings and Energy & Resources segments.
• Gross margin stood at CAD 466.4 million, declined from CAD 506.7 million in Q1FY20, while gross margin stood flat at 53.1%, v/s 53% in pcp. The decline was primarily attributed to lower income, partially offset by lower direct payroll costs (CAD 412.3 million v/s CAD 448.5 million in pcp).
• EBITDA from continuing operation stood at CAD 129.1 million v/s CAD 128.2 million in pcp. EBITDA margin improved to 14.7%, from 13.4% in pcp, supported by lower administrative and marketing expenses (CAD 341.5 million v/s CAD 367.3 million in pcp).
• The group posted net income of CAD 50.9 million, as compared to CAD 29.5 million in Q1FY20. The growth was driven by improved EBITDA coupled with lower net interest expense (CAD 9.3 million, v/s CAD 15 million in pcp).

Q1FY21 Income Statement Highlights (Source: Company Report)

Risks: If the pandemic continues, the group might witness a setback in its performance due to lower capital allocation or postponement of capital-intensive projects by the company’s clients.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The company has a manageable debt, while its net debt to EBITDA stood at 0.8x in Q1FY21, down from 1.3x in Q1FY20. Moreover, apart from a healthy free cash flow generation, the company also has the option of ~CAD 800 million in undrawn credit capacity, which seems to be sufficient to fund its working capital and as well as its capital investments. We expect the demand for the group’s offerings to improve as the economy is coming back on track. We have valued the stock using the Price to Earnings based relative valuation method and have arrived at a double-digit upside (in percentage terms). For the said purposes, we have considered peers like WSP Global Inc, Atlas Technical Consultants Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock at the closing price of CAD 53.40 on June 09, 2021.

One-Year Technical Price Chart (as on June 09, 2021). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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