DBRS Morningstar Assigns New Ratings to Stantec, Inc.

DBRS Limited (DBRS Morningstar) assigned Stantec, Inc. (Stantec or the Company) an Issuer Rating of BBB with a Stable trend. DBRS Morningstar also assigned Senior Unsecured Revolving Credit Facility and Senior Unsecured Term Loans ratings of BBB, again with Stable trends. Finally, DBRS Morningstar assigned a Provisional Senior Unsecured Notes rating of BBB, also with a Stable trend. As of September 24, 2020, Stantec had no Senior Unsecured Notes outstanding; if Stantec issues Senior Unsecured Notes in the future, DBRS Morningstar expects the issuance to be on terms and conditions consistent with market practice and satisfactory to DBRS Morningstar, including guarantees (if any) consistent with Stantec's unsecured revolving credit facility. The assigned ratings primarily reflect Stantec’s strong investment-grade business and financial risk profiles. Stantec, a globally ranked pure-play engineering design firm, operates in a well-diversified set of subsectors and has several robust, structurally sustainable business strengths. The Company is recognized as a global leader in the water and sewage engineering design subsectors and has built a brand over many decades that is associated with high competence in the provision of these services. The Company benefits from significant customer loyalty, with very little churn among its most important clients. Stantec earns over half of its revenue from variable fee contracts, while exhibiting less lumpiness in its contracted revenue compared with some peers as a result of its focus on generating the majority of its business from smaller and medium-sized contracts. The Company is one of the most profitable firms among its peer group. The ratings also take into consideration the Company’s somewhat concentrated geographic diversification, which is largely focused on North America, and Stantec’s overall market position, which does not place it among the sector’s global leaders in aggregate terms.

Stantec’s recent performance has been solid, despite being negatively affected by the Coronavirus Disease (COVID-19) pandemic. Broad-based and strong organic growth in Q1 2020 gave way to a retraction in Q2 2020, as a result of project slowdowns and deferrals. This performance comes after a strong 2019, during which the Company achieved 4.4% net organic growth, and complemented this with 5.2% of net revenue growth through acquisitions, consistent with its long-term plan. Overall, engineering consulting firms have not been significantly affected by the pandemic relative to companies in more vulnerable sectors and many of Stantec's service activities are considered essential and can been performed remotely with relative ease. Stantec's pandemic plan, already in place for over a decade, prepared the Company for the coronavirus outbreak, and with $266 million in cash on the balance sheet as at June 30, 2020, over $300 million in undrawn capacity, and access to an additional $600 million in funds from the revolving credit facility if required, its liquidity position remains strong. While new business and acquisition activity has been restrained, the Company’s projected recovery beginning in 2021 is consistent with DBRS Morningstar’s publicly stated expectations.

Looking ahead, DBRS Morningstar does not anticipate any material changes to the Company’s robust business risk profile. While expectations for the financial risk profile in 2020 are tempered by the impacts of the pandemic, DBRS Morningstar continues to project key credit metrics that are overall well into the BBB category. DBRS Morningstar’s expectations for a global economic recovery in 2021, and more specifically in the United States and Canada, should support an overall strengthening of the financial risk profile going forward. Note that DBRS Morningstar’s outlook incorporates notable, but not transformative, acquisition activity, consistent with the Company’s prudent approach to growth, which consists of organic expansion complemented by manageable acquisitions. With regard to the Company’s acquisition plans, although on pause for the time being because of the coronavirus, going forward DBRS Morningstar expects Stantec to focus on relatively small targets. DBRS Morningstar does not anticipate any meaningful debt additions in order to facilitate transactions as a result of the Company’s ability to generate substantial free cash flow, even after steadily rising dividend allocations and capital expenditures, the latter of which are traditionally not onerous in this sector.

Overall, from a credit perspective, DBRS Morningstar expects Stantec to remain largely unchanged from a business risk perspective in the coming years, although greater geographic diversification away from North America would be supportive. In terms of the financial risk profile, the combination of greater earnings and cash flow from organic and acquisition growth, coupled with DBRS Morningstar’s expectation that substantial incremental debt and lease liabilities will not be required to achieve this, should support a stronger financial profile going forward. A substantial, unfavourable change to the underlying business risk strengths and/or a protracted, significant weakening of the financial profile could lead to a negative rating action. Given the types of services being provided, the Company’s strategy, and the disparate, relatively loyal set of clients for whom Stantec works, DBRS Morningstar does not anticipate this being a material concern in the near-term.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is Rating Companies in the Services Industry (February 5, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].]

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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