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

DBRS Limited (Morningstar DBRS) confirmed Stantec Inc.'s (Stantec or the Company) Issuer Rating at BBB with a Stable trend. Morningstar DBRS 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.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect Stantec's steady operating performance, its strong key credit metrics, and free cash flow generating capacity. Stantec has recently reported results of the nine months ended September 30, 2024. The Company achieved 14.8% net revenue growth, derived through an almost even mix of organic growth and contribution of acquisitions, with growth across most of its operating divisions. Morningstar DBRS adjusted Debt-to-EBITDA (debt-to-EBITDA) rose to 2.6 times (x) during the last 12 months ending September 30, 2024, because of increased debt to fund acquisitions. In the past, the Company has managed to significantly deleverage following large acquisitions and therefore, debt-to-EBITDA is expected to remain relatively stable over the medium term. 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 credit 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.

CREDIT RATING DRIVERS
Morningstar DBRS expects Stantec's credit ratings to remain supportive of the rating category in the near term. A positive credit rating action could occur if there were material improvement in Stantec's business and financial risk profile, including but not limited to geographic diversification and/or a strengthened earnings profile such that debt-to-EBITDA improves to levels below 2.0x on a normalized and sustainable basis. Conversely, a substantial deterioration of key credit metrics for an extended period and/or any weakening in the Company's strong market position and brand strength could lead to a negative credit rating action.

EARNINGS OUTLOOK
Looking ahead, Morningstar DBRS believes that Stantec's operating performance will continue to benefit from its expertise in water, infrastructure, and sustainability-linked projects; the spending on all of which is expected to remain strong across the Company's geographic platform. Morningstar DBRS expects revenue growth to be supported by Stantec's record backlog and robust demand. Operating costs are expected to remain relatively steady. Thus, Morningstar DBRS believes the Company will be able to sustain its strong adjusted EBITDA margins.

FINANCIAL OUTLOOK
Morningstar DBRS expects Stantec's financial profile to remain strong for the rating category, supported by its strong free cash flow generating capacity and sustainable key credit metrics, at levels considered comfortable for the rating category. Given the strong cash generative power of the business, Morningstar DBRS expects the Company to continue to be opportunistic with regards to acquisition activity and share buybacks going forward. Other than temporary deviations to pursue acquisitions, debt-to-EBITDA is expected to remain relatively stable over the medium term.

CREDIT RATING RATIONALE
Stantec's credit ratings are supported by its brand strength, reputation, and its ability to service a diversified client base as demonstrated by its long-term customer relationships. Demand for its services remains strong, with global leadership in water and sewage subsectors and a reduction in revenue derived from highly cyclical industries, such as oil & gas to below 5% of net revenues. It is also supported by Stantec's strong operating efficiency and its free cash flow generating capacity, allowing it the flexibility to continue to invest in growth. The credit ratings also take into consideration Stantec's geographic concentration in North America and integration and financial risk in connection with the Company's acquisition strategy.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings, August 13, 2024, https://dbrs.morningstar.com/research/437781.

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)

(A) Weighting of BRA Factors 
In the analysis of Stantec, the relative weighting of the BRA factors was approximately equal. 

(B) Weighting of FRA Factors 
In the analysis of Stantec, the relative weighting of the FRA factors was approximately equal. 

(C) Weighting of the BRA and the FRA 
In the analysis of Stantec, the BRA carries greater weight than the FRA. 
 
Notes:
All figures are in Canadian dollars unless otherwise noted.

Morningstar DBRS applied the following principal methodology:
-- Global Methodology for Rating Companies in the Services Industry (September 13, 2024), https://dbrs.morningstar.com/research/439363

Morningstar DBRS credit ratings may use of one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024), https://dbrs.morningstar.com/research/431186, which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:
Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024)
https://dbrs.morningstar.com/research/437781

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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 info-DBRS@morningstar.com.

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.

Morningstar DBRS 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. Morningstar DBRS trends and credit ratings are under regular surveillance.

Information regarding Morningstar DBRS credit ratings, including definitions, policies, and methodologies, is available on https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.

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