Maxim Sytchev in Toronto, on Nov. 27, 2019.Christopher Katsarov/The Globe and Mail
The industrials sector has been hard hit with only a handful of stocks in the sector posting gains in 2022. However, the decline in certain industrials stocks may represent buying opportunities for long-term investors. To help investors identify potential winners amongst the stock market wreckage, we spoke with Maxim Sytchev, a top-ranked analyst at National Bank Financial. In March, 2022, he was named the Brendan Wood TopGun industrial products analyst for the sixth consecutive year.
You are recommending four stocks that you believe will provide high returns to investors, despite the challenging environment that we are in.
When you look at the performance of the businesses that I will be discussing, in previous downturns they have been extremely resilient. What I’m recommending to investors is scaling up the quality ladder.
WSP Global Inc. is your first recommendation. Many stocks have seen their target prices lowered. However, in June, you increased your target price to $182. Why do you like WSP?
WSP is a must-own name if you believe in global infrastructure investment and ESG trends. It has made several large-scale acquisitions that significantly high-graded its water and environmental expertise. In terms of absolute revenue generation, it is by far the largest engineering consulting company with exposure to the environmental vertical right now in North America and globally.
It recently announced a highly accretive acquisition, purchasing consulting assets from Wood Group. For this year, we are projecting EBITDA [earnings before interest, taxes, depreciation and amortization] of $1.2-billion and then, because the Wood Group transaction is closing in the fourth quarter, you have the full lift in 2023 with EBITDA of $1.48-billion expected.
It remains an extremely fragmented marketplace so we feel that as the company progresses through its strategic plan, it should be able to do several other accretive deals.
Tell us about the stock’s valuation.
My target price is based on a 15 times EV-to-EBITDA [enterprise value-to-EBITDA] multiple on our 2023 numbers. Nine months ago, it was trading at 17 times. Now, it’s in line with the median multiple over the past five years.
When we look back to previous recessionary periods, the company’s organic growth has been resilient and that’s really driven by its end-market exposure because more than 50 per cent of its clients are government-funded agencies. Also, it’s a backlog-driven business, so you have revenue visibility of at least 12 months on a going-forward basis. So when we looked at previous recessionary periods, WSP doesn’t have a mean organic growth rate that goes down to, say, minus 20 per cent – it goes to minus 1, minus 2 per cent. Also as a consulting entity, it also has the ability to adjust the head count to preserve its margin profile, and consultants have the ability to pass wage inflation on to their clients.
Let’s move on to your second stock pick, ATS Automation Tooling Systems . You anticipate a potential robust return with your target price at $52 while the current share price is in the $30s.
ATS Automation provides automation solutions to enable physical manufacturing of products. It has very defensive end market exposures. The company has realized significant margin improvement. When the CEO joined the company in 2017, the EBITDA margin was at 10 per cent, right now, it’s at 14.6 per cent, and I think the margin can increase further. The company not only integrates somebody 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 ability 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 for this? Companies automate. Very few companies in Canada have exposure to the automation theme. And you potentially have [Organisation for Economic Co-operation and Development] OECD countries trying to decouple from the Chinese supply chain, so you need companies such as ATS that will enable that transition. We haven’t even started seeing the potential benefits from these long-term themes.
It’s trading at an EV/EBITDA multiple of around 11 times on their fiscal 2024, which is basically calendar 2023, in line with its five-year average.
How’s 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 as far as four times, but we’re not envisioning such an outcome because the company also issued a shelf prospectus maybe eight or nine months ago for $1.5-billion. Obviously, management is looking to expand over time given its ability to raise capital.
Let’s turn 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 that I expect will double in value over the next three years.
It’s an architecture firm, but one of the interesting things is that 20 per cent of the company’s top line comes from the Intelligence vertical. It’s basically like a software company trapped within an architecture firm. For example, on Highway 407, as the car travels you have plate recognition – calculations are done to match your billing to your licence plate and so forth. And once you lock in a client, like the 407, there’s no incentive to go elsewhere. We think just the intelligence part of the business is worth the entire market cap of the company, even though it’s only 20 per cent of the top line.
IBI is the sixth-largest architecture company globally with a public-sector exposure of 65 per cent. So again, when we think about durability of revenue generation, it’s certainly there.
The company hosted its annual general meeting a couple of weeks ago and management’s plan is to double the size of the company, in terms of EBITDA, by 2026. Leverage is basically zero so they will have the ability to do this using the balance sheet. The organic growth rate for IBI has been by far the strongest of any consulting company that we cover and continues to be extremely robust with a backlog at an all-time high, so revenue visibility is excellent.
My $20 target price is based on a 12 times EV/EBITDA multiple on 2023.
And the final stock you are recommending is Colliers International Group Inc. Your target price is US$164. Briefly tell us about the company and your investment thesis.
Colliers is a diversified professional services and investment management company. Insider ownership is 20 per cent so there’s an alignment of interests with shareholders. I feel Colliers is an extremely high quality company with a very strong capital allocation track record and an unlevered balance sheet. I think it is in a position to make acquisitions to meet management’s pretty aggressive growth targets.
Last year, the company unveiled its Enterprise ‘25 growth strategy with plans to more than double its profitability relative to 2020 by the end of 2025. Right now, 50 per cent of revenue is recurring in nature. Management targets adjusted EBITDA from recurring revenue of greater than 65 per cent by the end of 2025. In 2021, EBITDA was US$544-million. We forecast US$632-million in 2022 and US$693-million in 2023. Given the fact that leverage is only 0.9 times, it certainly has the ability to deploy capital. And the other critical part of the business is that it has repositioned the asset base to become less cyclical. So not only is the business becoming less volatile, its rising contribution from investment management typically garners higher trading multiples. So we’re using a 13 times EV/EBITDA multiple.
I don’t know where the stock is going to 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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