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WSP (WSP) Stock | TSX: WSP.TO

Engineering a Roll-Up Strategy

WSP Global Inc. 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 (US and Latin America), EMEIA (Europe, Middle East, India and Africa), and APAC (Asia Pacific, comprising Australia, New Zealand and Asia).

Growth

46

Valuation

91

Quality

55
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Where Are We Now

Updated on: 11/13/2021

Conviction Score

8

WSP is growing from all angles due to the demand for global infrastructure, its ability to conduct hundreds of lucrative acquisitions, and increase cross-selling opportunities with its expanding ecosystem while cash flows into the business. The company continues to execute well today and our thesis will likely be intact for as long as WSP continues on this trajectory.

  • WSP continues to grow through acquisitions. It acquired three companies this year and closed the acquisition of Golder Associates in April 2021 costing WSP about $1.2 billion this year. Revenue is up 20% since last year with over 4% of that being organic growth.

  • WSP’s service backlog keeps getting bigger and bigger. Now at a record $10 billion, this represents nearly a full year of revenue, up by almost 20% since last year. Lots of this growth was from acquisitions, but organic growth was good too (almost 6%).

Investment Thesis

  1. WSP Global is executing a roll-up strategy of the highly fragmented engineering and professional services firms globally.

  2. Acquisitions in professional services provide excellent synergy and opportunity for cross-selling as the mothership firm expands capabilities across different verticals.

  3. WSP can benefit from the strong demand for infrastructure globally.

  4. Providing just professional services, WSP exists in the capital-light side of the infrastructure value chain meaning the business spits out significant free cash flow to fuel further acquisitions.

  5. WSP is well positioned to grow in the environmental services sector completing large acquisitions of environmental engineering firm, Golder Associates.

  6. Their prolific M&A of over 180 companies has demonstrated an ability to deploy capital at scale and consistently boost cash flows with a compounded annual growth rate (CAGR) of over 30% on free cash flow.

The Basics

As a consulting firm, WSP provides services related to engineering, design, planning and research for projects. Their projects are broken down into 6 different divisions, under 4 different regions.

Divisions:                                                                                                       

  • Property & Buildings

  • Environment

  • Transportation & Infrastructure

  • Industry

  • Resources

  • Power & Energy

Regions

  • Canada

  • Americas

  • Europe, the Middle East, and Africa (EMEIA)

  • Asia-Pacific (APAC)

WSP Revenue in Americas (Q3 2021)

Source: WSP Investor Relations

WSP Revenue in Canada (Q3 2021)

Source: WSP Investor Relations

WSP Revenue in APAC (Q3 2021)

Source: WSP Investor Relations

WSP Revenue in EMEIA (Q3 2021)

Source: WSP Investor Relations

The History of WSP

GENIVAR was a multidisciplinary engineering services firm operating in Quebec. Between 1993 and 2012, the company acquired more than 90 different firms to expand its business across the country, starting with Ontario. By 2012, the company was the largest professional services firm in Canada, having offices in every province.

As the years went on, GENIVAR expanded outside of Canada into the United Kingdom, acquiring a consulting company called WSP Global PLC. This acquisition helped the business expand worldwide, as the company already had 15,000 workers in over 300 offices worldwide. In January 2014, GENIVAR changed its name to WSP Global.

Throughout its expansion into the UK, WSP Global also entered other continents and countries such as Latin America and the Caribbean. To date, WSP Global operates out of 39 countries, with 500 offices and nearly 32,000 employees.

The Global Strategic Plan

As WSP is already a company known worldwide, they plan to expand their business even further in order solidify their name as the leading global engineering firm. It all starts with building a strategic plan centered around their clients.

The three main pillars of this plan are people & culture, expertise, and operational excellence. The main emphasis for WSP is putting their clients first. Their ideology revolves around building and nurturing long lasting rapports, that will carry on for years to come.

WSP's Global Strategic Plan graphicSource: WSP.com

In terms of people and culture, WSP successfully builds a competitive yet friendly work environment for their employees. One of the biggest advantages that the company has to offer is being a multinational company. Employees are flexible in where they are able to work, whether it be in North America, Europe, or Asia. This alongside with the competitive benefits that the company has to offer, helps to make employees feel appreciated and keeps the work culture positive. When a company builds a strong and happy employee base, it easily translates over to building healthy rapports with clients.

When talking about expertise, what makes WSP such an outstanding company is their ability to hire lead engineers and consultants who are exceptional in their respective field. Having a certain level of expertise among all employees ensures WSP is able to take on complex projects while adhering to a certain level of quality.

Lastly, the attributing factor to WSP’s success is operational excellence. As WSP takes on large multi-billion-dollar projects, they have a certain standard of quality to adhere to. From a business perspective, a well-run company structure with high standards, generates industry-leading margins, allowing increased investment opportunities in other areas.

Prolific M&A

Any roll-up strategy requires prolific M&A (mergers and acquisitions).

Beginning from their roots, WSP Global has acquired an impressive number of companies to expand their business into different countries and industries. To get to where they are today, the company has acquired over 180 companies.

There are two implications when acquiring a vast number of companies.

Firstly, WSP can expand their business. They have more capabilities and have more resources at hand which allows for cross-selling of various engineering services ultimately driving higher revenue and free cash flow.

This cycle can continue to help WSP acquire even more companies.

WSP Revenue ($M) (Q3 2021)

WSP Free Cash Flow ($M) (Q3 2021)

The most important part about acquiring these companies is to consolidate competitors and become a market leader in that respective industry. As WSP is such a powerful company, with cash, capital, and influence, they are able to buy out competitors in an industry, expand on their current market presence, generate revenue and free cash flow, and repeat the same process.

WSP Flywheel

This step-by-step process is what allows WSP to be so dominant in so many industries, providing an abundance of consulting services to its clients.

The ability to consolidate and be a multi-disciplinary engineering firm allows for cross selling professional services across the regions they serve.

Engineering a Roll-Up

Engineering a Roll-Up. Get it?

Essentially, this type of business strategy is done by companies to buy out smaller companies in the same industry and consolidate them into one big company.

Roll-Up Strategy GraphicSource: CFA Institute

Benefits of the Strategy

One benefit of using the Roll-Up Strategy is that it allows companies to combine their assets and resources into one large pool. In WSP’s case, buying out smaller companies allows them to take over the previous companies’ resources, such as workers, products, services, customers, and use them for WSP’s benefit.

This helps to widen WSP’s scope of services as they are able to provide to different types of client-needs. In addition, this lets them cross-sell other engineering services to existing customers.

The second benefit is that the Roll-Up Strategy incurs lower production and operation costs while also increasing revenue. As WSP can buy out smaller companies, their cost of production will not increase as they have a substantial increase in capital through the smaller companies. This can then be used to generate more revenue.

The Golder Acquisition

A prime example of WSP’s business strategy can be seen with its recent acquisition of Golder Associates. Golder Associates is a large environmental and geo-sciences engineering firm, operating out of 30 countries, with over 7,000 employees.

This deal, worth $1.14 billion, paid in cash, allows WSP to expand its environmental and geotechnical services.

In addition, WSP’s goal with on focusing on the environment will set the company up for success in the future as there is a big emphasis on climate change and creating safe solutions for projects that are environmentally friendly.

Risks

The biggest risk with WSP is their reliance on mergers and acquisitions. Despite having previous acquisitions that helped to further strengthen the company, there may be some that hurt the company more than they do benefit them.

There is very little organic growth. Perhaps the predicted strong demand for infrastructure coming may boost organic growth.

The first case would be if WSP overpays for engineering firms lowering ROIC (return on invested capital). As the company is starting to buy out larger companies, they should be looking into making smarter investments and ones that reside with the company’s financial and future goals.

The second case for a poor investment would be if the company acquired by WSP does not meet a certain standard of quality. What makes WSP such an outstanding business is their ability to provide quality services from some of the best professionals in the industry.

If they fail to meet that standard due to a sub-par acquisition, it could be an issue for the company and their reputation as reputation and reliability in the professional engineering services industry is everything.

Bottom Line

WSP is a first-class company when it comes to providing quality services related to engineering consulting. Their diverse selection of services along with their wide reach to clients allow for strong market presence and margins.

In terms of acquisitions, WSP continues to purchase engineering firms around the globe allowing the company to generate strong year over year growth along with being a front runner in engineering consulting.

Their Global Strategic Plan, with a focus on its people, expertise, and operational excellence are three pillars that will help strengthen this business for future growth.

The medium term strong expected demand for infrastructure provides excellent tailwinds for WSP with opportunity for substantial growth organically and through M&A activity.

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