DBRS Morningstar Confirms Credit 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 credit ratings on the Senior Unsecured Revolving Credit Facility, Senior Unsecured Term Loans, and Senior Unsecured Notes, all at BBB with Stable trends. The credit rating confirmations reflect Stantec's continued strong performance over the past 12 months, with robust organic growth along with margin expansion. Leverage metrics improved compared with 2021 and 2022, consistent with the Company’s commitment following the Cardno acquisition and DBRS Morningstar’s expectations.

Stantec's investment-grade credit ratings continue to reflect the Company's strong 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 also incorporate certain challenges that the Company faces, including a more geographically concentrated footprint, largely focused on North America with a bias toward the United States in comparison with its more globally diversified peers.

Stantec's operating performance in the last 12 months has been strong, with revenue growth of 17% year over year and DBRS Morningstar-adjusted EBITDA growth of 33%. This strong revenue growth has been achieved across most of its operating divisions, particularly the Water segment. The Company has grown EBITDA margins through higher employee utilization, operating efficiency improvements, and cost containment measures. As a result, the Company improved its credit metrics with the DBRS Morningstar-adjusted debt-to-EBITDA ratio improving to 2.5 times (x) compared with 2.8x in 2022. Stantec's liquidity position remains robust, with $172 million available in cash along with $455 million in undrawn capacity and access to an additional $600 million in funds from its syndicated facilities.

DBRS Morningstar expects Stantec's business risk assessment to remain largely unchanged in the near term. DBRS Morningstar expects that the Company will continue to benefit from its large exposure to the public sector and sustainability-linked projects, which are likely to remain relatively resilient to any macroeconomic slowdown. In terms of the financial risk profile, DBRS Morningstar expects the Company to be relatively more aggressive toward acquisitions in the near term but, given strong internal cashflow generation along with the recent announcement to raise $250 million to $288 million in equity, leverage metrics are likely to remain acceptable for the current credit rating.

Overall, DBRS Morningstar expects Stantec’s credit ratings to remain supportive of the rating category in the near term. However, a substantial deterioration of the financial metrics for an extended period of time and/or any weakening in the Company's strong market position and brand strength could lead to a negative credit rating action. In contrast, a major improvement in the business risk profile, including but not limited to geographic diversification and/or a substantial and protracted improvement in credit metrics, may result in a positive credit rating action.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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/416784 (July 04, 2023)

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Services Industry (February 14, 2023) https://www.dbrsmorningstar.com/research/409773.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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 credit ratings are under regular surveillance.

Information regarding DBRS Morningstar credit ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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