On the Road: Building a Better Tomorrow with Stantec

In May, members of the Pembroke investment team travelled to Lower Mainland, British Columbia, to tour the Annacis Island Wastewater Treatment Plant, a large refurbishment project highlighting Stantec’s expertise.

With its 26,000 employees across six continents, Stantec is an Edmonton-based design and engineering services company that has been in Pembroke portfolios since the early 2000s.

Faced with a growing population and aging facilities, Metro Vancouver is upgrading one of the region’s largest wastewater treatment plants, connecting 14 municipalities representing 60% of British Columbia’s total population.With the help of Stantec’s skilled engineers, designers, scientists and project managers, the upgrade includes:

• Building a new outfall pipe to carry treated wastewater from the plant to the Fraser River
• Increasing the size of the plant and its ability to treat wastewater
• Repairing or replacing older parts of the existing plant
• Strengthening the plant to reduce the impacts of an earthquake
• Improving existing odour controls
• Building a more reliable back‐up power source

The Opportunity

Tackling water scarcity and quality issues is becoming common in infrastructure projects, as Stantec customers are increasingly faced with aging infrastructure and growing communities.

Furthermore, crumbling assets are unfortunately not just limited to water treatment plants. Assets pushed overcapacity due to decades of under-investments also include highways, bridges, hospitals and power grids. Renewed spending in existing assets has become an important driver of demand for Stantec’s services.

Equally important for Stantec is demand for new projects, the ones captured by cameras representing community leaders with smiling faces and golden shovels in their hands. With the reshoring initiatives aimed at bringing back well-paid manufacturing jobs back to America, Stantec is busy.

As an example, the company is involved with five of the ten largest semiconductor companies developing their U.S. manufacturing facilities. Other examples of new projects include Stantec’s work in accompanying customers in their fight against climate change. Stantec engineers are currently designing Light Rail Train and Zero Emission transit systems, wind farms and solar parks, as well as conducting several environmental assessments for new projects.

Stantec’s Position

Stantec’s divisions and expertise are aligned with where demand trends are currently the strongest, as demonstrated by the company’s financial progress. Recent results show revenue and earnings growing organically at a double-digit pace. In fact, while most companies are seeing their results slow down due to economic uncertainty, Stantec’s are accelerating.

Lending further confidence in the sustainability of the pace of growth is the U.S. government’s recent Inflation Reduction Act. This Federal Law authorizes in 2022 the spending of close to $US400B on energy and climate change. Through the skills and experience of its engineers, we believe Stantec will win its fair share of these stimulus funds.

Stantec’s reputation will also help: it was recently recognized as the seventh most sustainable company in the world by Corporate Knights. In fact, the main challenge facing Stantec will not be demand. It will be its ability to recruit talented engineers and manage rising wage pressures.

Acquisitions

Complementing Stantec’s organic growth is the company’s internally funded acquisition plan. The company’s attractive balance sheet and strong free cash flow will easily fund several acquisitions in the upcoming quarters and years. Save for a bad acquisition in the construction industry in the late 2010s, management’s history of successful acquisitions at attractive valuations is enviable.

The engineering industry is composed of several small to mid-sized engineering firms, and Stantec is one of few logical acquirers for these businesses. Once in Stantec’s hands, these acquired businesses typically accelerate their growth by benefitting from Stantec’s scale and resources.

Over Pembroke’s 20-year investment experience in Stantec, we have admired the quality of the business. The company has not lost money in over 65 years!

We have also developed a clear understanding of Stantec’s competitive advantages and business model. The Annacis Island water treatment plant facility visit further increased our appreciation and confidence in Stantec’s capabilities. Every additional data point helps our decision-making process by building an ever-clearer mosaic.

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