WSP Group: diversity and visibility

Diversification is the strategic cornerstone of engineering consultant WSP, famed for delivering ‘trophy’ buildings to global corporations.

Increasingly international in scope, the company, whose clients include RBS and Goldman Sachs, continues to diversify by region, sector, skills and clients to ensure growth throughout the economic cycle. Moreover, WSP offers investors terrific visibility, having grown orders to a record £940 million last year as it continued to win market share. Despite all this, misguided concerns related to the credit crunch have hit the shares, which trade on bargain multiples.

Financials for 2007 beat analysts’ forecasts, revealing a 46 per cent pre-tax profits push to £40.1 million, from sales of £577.4 million (2006: £449.4 million), reflecting organic growth and acquisitions. Profit margins nudged up to 7.6 per cent (2006: 6.8 per cent) and, following another excellent year of cash generation, chief executive Chris Cole and finance director Malcolm Paul increased the total dividend from 9p to 12p.

The duo reported strong progress across the group’s property, transport and infrastructure and environmental operations. ‘We grew our revenues (by £128 million),’ reflects Paul, ‘and we’ve grown our profit margins, which shows we are not having to cut our prices in order to win market share.’

According to Paul, many factors underpin the recent success of WSP and its growing resilience. ‘We have international coverage and are winning market share because we are in so many places and we have relatively few competitors,’ he explains. This is especially true in the market for high-rise buildings, where WSP draws fees over lengthy time periods through stages ranging from concept design through to construction supervision and where ‘we have only one real global competitor’.

Investors have worried that the credit crunch will hit spending on capital projects, and crisis in the credit markets has afflicted commercial property developments in the UK and the US. However, WSP has no exposure to speculative development. Rather, it remains busy on long-term, high-profile projects such as the Shard of Glass at London Bridge, set to be Europe’s tallest building, as well as on the three towers at Ground Zero in New York, work that runs right through until 2012.

Furthermore, Paul insists that ‘there are a hundred and one reasons’ why the group will continue to flourish in fair economic weather or foul. Among them is the underemphasised fact that WSP works in the public sector as well as the private in all of its main regions. It has also proven its ability to grow margins through good operational efficiency and staff utilisation levels, and it continues to diversify through sensibly priced takeovers. For instance, acquisitions completed in 2007 have taken WSP into countries such as Germany and Australia, as well as new sectors such as industrial process engineering in the UK and China, and transportation and bridge inspection in the US.

Earnings visibility is another huge tick in the box. Within the £940 million year-end order book, which has since passed the £1 billion mark, around 67 per cent of the company’s 2008 sales target is secured and more than 40 per cent of the work required to hit the 2009 numbers is already in place.

This year, analysts are looking for further strong profits growth to £46.6 million, ahead of £52.6 million in 2009, giving earnings of 50.4p and 56.9p respectively and likely dividends of 13p and 14.5p. Based on those metrics, the shares trade on prospective multiples of only 11.6 and 10.3, and offer solid yields of 2.2 and 2.5 per cent. Growth Company Investor believes recent share price weakness presents a terrific buying window.

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