DBRS Morningstar Confirms Ratings of Stantec Inc. at BBB, Stable

DBRS Limited (DBRS Morningstar) confirmed the Issuer Rating of Stantec Inc. (Stantec or the Company) at BBB with a Stable trend. DBRS Morningstar also confirmed the Senior Unsecured Revolving Credit Facility, Senior Unsecured Term Loans, and Senior Unsecured Notes ratings at BBB, all with Stable trends. The ratings continue to reflect Stantec’s strong investment-grade business and financial risk profiles. Notably, Stantec remains one of the most profitable firms among its peer group while operating in a well-diversified set of subsectors. The ratings take into consideration the Company’s somewhat concentrated geographic diversification, which is largely focused on North America with a bias toward the United States.

Stantec’s recent operating performance has been strong with net revenue growth of 18.5% in the last 12 months ended September 2022, after flat revenues in 2020 and 2021 resulting from the impacts from the Coronavirus Disease (COVID-19). The Company also achieved DBRS Morningstar-adjusted EBITDA margins in excess of 14%. Acquisition activity within the 12 months (most notably the acquisition of Cardno Limited (Cardno)) has resulted in higher leverage, elevated integration costs, and working capital outflows. DBRS Morningstar expects this to normalize in the near term as the Company focuses on debt repayment, supported by strong operational cash flows. Also, with $139 million in cash on the balance sheet as at September 30, 2022, $81 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.

DBRS Morningstar expects Stantec's business risk assessment to remain largely unchanged in the near term, although greater geographic diversification away from North America into jurisdictions with similarly-low risk profiles would be supportive of the rating. Note that DBRS Morningstar’s outlook incorporates acquisition activity that is in line with historical trends and consistent with the Company’s overall focus toward organic expansion complemented by manageable acquisitions. DBRS Morningstar expects that the Company will remain relatively resilient to any global activity slowdown because of its large exposure to public sector and sustainability-linked projects, where spending is likely to remain strong. In addition, Stantec's ability to pass on inflationary cost increases, largely because of the nature of its contracts as well as its healthy relationship with customers, should continue to support its strong margins. In terms of the financial risk profile, despite an increase in leverage resulting from the Cardno acquisition, DBRS Morningstar continues to project near-term key credit metrics that are consistent with the BBB rating category. Any weakening in the company's strong market position and brand strength, and/or a substantial, protracted deterioration of the financial metrics could lead to a negative rating action. However, given the types of services being provided, the Company’s track record, and a relatively loyal set of clients for whom Stantec works, DBRS Morningstar does not anticipate this being a material concern in the near term.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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

The principal methodologies are Rating Companies in the Services Industry (January 28, 2022) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (April 4, 2022) which can be found on dbrsmorningstar.com under Methodologies & Criteria.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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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