The industrials sector has been hit hard, with only a handful of stocks in the sector posting gains in 2022. However, declines in some industrial stocks may represent buying opportunities for long-term investors. To help investors identify potential winners among the stock market wrecks, we spoke with Maxim Sytchev, a top analyst at National Bank Financial. In March 2022, he was named Brendan Wood TopGun Industrial Products Analyst for the sixth consecutive year.
You recommend four stocks that you believe will provide strong returns to investors, despite the difficult environment in which we find ourselves.
When you look at the performance of the companies that I’m going to talk about, in previous downturns, they’ve been extremely resilient. What I recommend to investors is to increase the quality ladder.
WSP Global Inc. is your first referral. Many stocks have seen their target prices drop. However, in June, you increased your target price to $182. Why do you like WSP?
WSP is a go-to name if you believe in global infrastructure investing and ESG trends. It has made several large-scale acquisitions that have considerably strengthened its expertise in the field of water and the environment. In terms of absolute revenue generation, it is by far the largest engineering consulting firm exposed to the environmental vertical today in North America and globally.
He recently announced a highly accretive acquisition, buying advisory assets from Wood Group. For this year, we expect an EBITDA [earnings before interest, taxes, depreciation and amortization] of $1.2 billion, and then, as the Wood Group transaction closes in the fourth quarter, you have full swing in 2023 with an EBITDA of $1.48 billion expected.
It remains a highly fragmented market, so we believe that as the company progresses through its strategic plan, it should be able to complete several more accretive transactions.
Tell us about the valuation of the action.
My target price is based on a 15x EV/EBITDA ratio [enterprise value-to-EBITDA] multiple on our 2023 numbers. Nine months ago, it was trading at 17 times. Now it is in line with the median multiple of the past five years.
When we look back to previous downturns, the company’s organic growth has been resilient and that’s really driven by its end-market exposure, as over 50% of its clients are government-funded agencies. Plus, this is a backlog-focused business, so you have revenue visibility for at least 12 months into the future. So when we look at previous recessionary periods, WSP doesn’t have an average organic growth rate that goes down to, say, minus 20% – it goes down to minus 1, minus 2%. Still as a consulting entity, it also has the ability to adjust the number of employees to preserve its margin profile, and consultants have the ability to pass on salary inflation to their clients.
Let’s move on to your second choice of stocks, ATS Automation Tooling Systems. You anticipate a potential robust return with your target price at $52 while the current stock price is in the $30 range.
ATS Automation provides automation solutions to enable the physical manufacturing of products. It has very defensive end market exposures. The company achieved a significant improvement in its margin. When the CEO joined the company in 2017, the EBITDA margin was 10%, currently it is 14.6%, and I think the margin can still increase. The company not only incorporates someone else’s technology, but now generates a high percentage of revenue by selling its own products. Once you control your own destiny, you have the opportunity to optimize the supply chain, leverage best practices, and drive margin expansion.
There is another trend. We see wage inflation everywhere. So how do you control that? Businesses automate. Very few companies in Canada are exposed to the theme of automation. And you potentially have [Organisation for Economic Co-operation and Development] OECD countries are trying to decouple from the Chinese supply chain, so you need companies like ATS that will enable this transition. We haven’t even begun to see the potential long-term benefits of these themes.
It trades at an EV/EBITDA multiple of around 11x on their 2024 fiscal year, which is essentially the 2023 calendar, in line with its five-year average.
How is its balance sheet to fund acquisition growth?
Leverage, net debt to EBITDA, is 2.5 times. Management said that for the right transaction, it could go up to four times, but we don’t see such a result because the company also issued a shelf prospectus maybe eight or nine months ago for 1, $5 billion. Clearly, management is looking to grow over time given its ability to raise capital.
Let’s move on to your third stock pick, IBI Group Inc. You have a target price of $20 – the highest on the street.
This is my high conviction stock which I expect to double in value over the next three years.
It’s an architecture firm, but one of the interesting things is that 20% of the company’s revenue comes from the Intelligence vertical. It’s basically like a software company trapped in an architecture firm. For example, on the 407 freeway, when the car is moving, you get plate recognition – calculations are made to match your billing to your license plate, etc. And once you’ve locked in a customer, like the 407, there’s no incentive to go anywhere else. We believe that only the intelligence part of the business is worth the entire market capitalization of the company, even if it is only 20% of revenue.
IBI is the sixth largest architecture firm in the world with a 65% exposure to the public sector. So again, when you think about the sustainability of revenue generation, it’s definitely there.
The company held its annual general meeting a few weeks ago and management’s plan is to double the size of the company, in terms of EBITDA, by 2026. Leverage is virtually zero, they will have therefore the possibility of doing it using the balance sheet. IBI’s organic growth rate has been by far the strongest of any consulting company we cover and continues to be extremely robust with an order backlog at an all-time high, so revenue visibility is excellent. .
My target price of $20 is based on a 12x 2023 EV/EBITDA multiple.
And the final stock you recommend is Colliers International Group Inc. Your target price is US$164. Tell us briefly about the company and your investment thesis.
Colliers is a diversified professional services and investment management firm. Insider ownership is 20%, so there is an alignment of interests with shareholders. I think Colliers is a very high quality company with a very good capital allocation track record and a debt-free balance sheet. I think he has the ability to make acquisitions to meet management’s fairly aggressive growth targets.
Last year, the company unveiled its Enterprise ’25 growth strategy with plans to more than double its profitability from 2020 by the end of 2025. Currently, 50% of revenue is from recurring. Management is targeting adjusted EBITDA from recurring revenue above 65% by the end of 2025. In 2021, EBITDA was US$544 million. We forecast US$632m in 2022 and US$693m in 2023. Given the leverage is only 0.9x, it certainly has the ability to deploy capital. And the other critical part of the business is that it repositioned the asset base to become less cyclical. So not only does the business become less volatile, but its growing contribution from investment management typically generates higher trading multiples. We therefore use an EV/EBITDA multiple of 13 times.
I don’t know where the stock will be in three months, but over the next 24 months I’m extremely comfortable with this business.
The interview has been edited and condensed.
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