Stantec: Capitalizing On Infrastructure Boom Whilst Tackling Opportunities And Challenges

Thesis

Stantec (NYSE:STN) is a number one skilled providers agency offering a wide range of providers to the constructed atmosphere. Cyclical tailwinds within the business have pushed the share worth greater amid rising revenues and a big order guide. With the ahead PE now standing at 26x, I imagine the time is suitable to grasp if Stantec is worthy of an funding on the present valuation.

Acquisitions in Q1 have elevated headcount by over 2,700 expert employees within the first 4 months of 2024.

Introduction

Of their Q1 2024 earnings, Stantec introduced income progress of 12% YoY and reported a 23% improve in EPS to $0.90 per share. Income progress comprised 7% natural progress, with an additional 6% associated to acquisitions.

Stantec acquired three companies in early 2024 and elevated its headcount by over 2,700 expert employees within the first 4 months of 2024. The acquisitions of ZETCON and Morrison Hershfield which closed in Q1 are anticipated to broaden Stantec’s choices in these geographic areas by way of these complementary acquisitions.

As well as, Hydrock was acquired originally of Might. Hydrock is a UK-based consultancy agency specializing in built-in engineering design, vitality and sustainability providers. This acquisition expands Stantec’s UK headcount by over 30% and broadens the scope of providers obtainable to the UK market, notably for Infrastructure, Healthcare, Vitality, Schooling, Logistics and Public Works.

Consolidation has been a key driver of progress within the specialist advisory sector not solely by Stantec however its rivals are additionally incessantly buying smaller rivals. The scarcity of accessible expert labor has created the necessity for focused acquisitions of complementary companies, this technique could be a considerably costly technique of acqui-hiring the required expertise to broaden the enterprise choices, nevertheless capturing market share on this aggressive enterprise by way of acquisitions permits Stantec to proceed their market management offering a various array of providers throughout geographic areas.

Enterprise Progress

2024 has begun with document revenues for Stantec, attaining 7% natural progress throughout all enterprise models and acquisition progress including 6% topline progress. Two key standout enterprise models are Water Providers and Buildings, each are rising organically in mid-teen percentages.

Margins throughout the group have been 15.5% in Q1 2024 enhancing 90 foundation factors 12 months over 12 months.

Following the acquisitions of ZETCON and Morrison Hershfield web debt to adjusted EBITDA stands at 1.5x ratio on the finish of Q1 2024, though this can be a YoY improve this ratio is throughout the enterprise goal vary of 1x to 2x.

The Water section is experiencing excessive progress, with a 16% YoY improve. Water infrastructure providers sometimes function on long-term contracts funded by native and state governments, which ensures a secure stream of tasks which might be sometimes phased over a number of years.

Opponents

Whereas most of Stantec’s rivals are usually not listed corporations, they however present related providers corresponding to Design, Engineering, Building Consulting and Environmental providers and compete to win the identical tasks. Beneath is a non-exhaustive checklist of some direct rivals:

WSP World (OTCPK:WSPOF)

Burns & McDonnell

AtkinsRealis Group (OTCPK:SNCAF)

AECOM (ACM)

Every of those constructed atmosphere specialist corporations competes throughout their varied choices, with labor usually transferring between corporations searching for higher alternatives, be it greater wages or higher tasks, relying on which firm is performing and profitable new tasks.

Shareholder Returns

Stantec’s whole returns over 5 years is a powerful 263% outpacing its closest friends by a big margin. With a ahead PE of 26x and natural progress anticipated to be 7% over the following three years, shares worth appreciation could possibly be restricted, nevertheless factoring in acquisition progress ought to assist help the share worth.

Though Stantec’s dividend yield is kind of low at 0.78% yield, the 6.4% dividend progress CAGR over 10 years has virtually doubled the dividend quantity for shareholders. The low payout ratio of 20.79% permits loads of room for dividend will increase when mixed with a rising EPS and revenues. I imagine there’s little danger to the dividend, however it’s unlikely those that are investing in Stantec are specializing in the dividend given the low yield.

Alternatives / Outlook

On the finish of the primary quarter, the order guide backlog amounted to $7 billion, the best recorded backlog for the enterprise. The sturdy order guide ought to assist drive optimistic outcomes for the rest of the 12 months. I imagine this order backlog will proceed to develop because the IIJA continues to roll out its infrastructure tasks. Stantec famous within the Q1 earnings name that the IIJA has launched the primary $400 billion of funding for its preliminary section of tasks. I count on Stantec shall be a significant beneficiary from these new tasks, notably their design and engineering providers specializing in infrastructure, which is considered one of their key areas of experience, the environmental arm of the enterprise is already concerned in lots of Infrastructure tasks corresponding to transit, bridge and freeway tasks funded by the IIJA that are underway throughout the US.

Hiring has continued at document ranges in 2024 with a view to meet the staffing necessities for the order backlog in addition to present contracts. Notably, there was good retention of present workers, which is a optimistic signal for firm tradition.

A current instance of the tasks that Stantec is at present staffing embody the British Columbia BC Hydro and Energy Authority, for which Stantec is offering challenge administration, and transmission & distribution engineering providers over a 7-year grasp service settlement valued at $186 million. These long-duration MSAs are extremely coveted amongst rivals because of the secure and constant revenues generated, in addition to the experience gained, which could be leveraged to win future tasks.

Authorities-funded PFAS tasks are anticipated to be a really sturdy contributor to the water enterprise following the EPA’s new laws setting the usual for ingesting water within the US, that are anticipated to create water infrastructure improve tasks throughout the nation.

Trying forward, expectations are for 7% natural progress over the following three years; nevertheless, I count on this goal could improve as soon as the current acquisitions are absorbed into the enterprise and value synergies are rolled out.

Resulting from Stantec’s massive order backlog, going ahead, challenge/shopper choice is predicted to be extra selective, concentrating on these purchasers with excessive margin tasks and minimal operational complications. By lowering publicity to these difficult-to-work-with purchasers who’re late, non-paying, or litigious inclined, this could allow greater ranges of productiveness and stronger working margins.

Healthcare stays considered one of Stantec’s most vital sectors within the constructing section, the place they’re extremely considered business leaders. Moreover, information facilities have gotten extra vital, with new challenge wins amid a constructing growth within the house.

Dangers

The aggressive consulting enterprise during which Stantec operates is very fragmented, with native specialists and huge multinational consulting corporations all concentrating on the identical contracts. Authorities contracts sometimes function on a aggressive tender submission mannequin with each quantitative and qualitative standards, enabling Stantec to face above the competitors by way of their skilled groups and a number of service choices. Small operators can compete aggressively in worth; nevertheless, Stantec’s assets imply high quality of service kinds a better a part of choice, as does being a longtime service supplier to these purchasers globally.

Labor challenges stay an operational danger for Stantec. With the most important order backlog on document, the necessity for extra expert labor to workers these tasks means headcount must develop. Acquisitions have added 2,700 further headcounts to this point in 2024, which equates to roughly 9% of the group headcount. Nevertheless, the development business is dealing with difficulties with declining numbers of recent entrants into the business, that means competitors for the most effective expertise could be very excessive, which in flip is fueling labor price will increase.

Authorities-funded tasks type a big a part of Stantec’s tasks; these tasks could be profitable, with long-duration packages extremely coveted by Stantec and their rivals. Nevertheless, Authorities work has a historical past of delays and cancellations for a wide range of causes, corresponding to modifications in administration. Ought to a change in coverage happen, the proposed capital expenditures might simply be postponed and even canceled, affecting skilled providers. For reference, the IIJA program was signed into legislation in November 2021, but funding is just now beginning to be issued.

Conclusion

Stantec’s Q1 outcomes present the enterprise continues to carry out effectively, each organically and thru M&A. Worker rely has elevated, and geographic growth is underway by way of new acquisitions in efforts to fulfill the demand for his or her providers. The order backlog, standing at a document $7 billion, supplies a strong provide of tasks for the rest of 2024 and into 2025. As well as, the deliberate infrastructure tasks from the IIJA shall be a key space of progress. I imagine Stantec shall be a beneficiary of this inflow of government-funded tasks.

The aggressive panorama stays extremely difficult; nevertheless, Stantec has not solely maintained their sturdy place available in the market; they’ve been constantly rising the highest line whereas managing to realize sturdy working earnings.

Would I purchase shares of Stantec at this worth? I can’t be including shares at these costs. I imagine the present valuation is unappealing, with a low margin of security at a ahead PE of 26x. Moreover, I imagine that continued M&A shall be crucial to ensure that Stantec to keep up the present valuation, as natural progress at 7% merely can’t justify the present valuation, so I shall be waiting for upcoming M&A transactions.

I charge the shares a Maintain because of the valuation; nevertheless, I imagine Stantec is performing very effectively, and I imagine this could proceed because of tailwinds within the business.

Editor’s Be aware: This text discusses a number of securities that don’t commerce on a significant U.S. trade. Please pay attention to the dangers related to these shares.