DBRS Morningstar Confirms Ratings of Stantec Inc. at BBB with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Stantec Inc.’s (Stantec or the Company) Issuer Rating at BBB with a Stable trend. DBRS Morningstar also confirmed the Company’s Senior Unsecured Revolving Credit Facility, Senior Unsecured Term Loans, and Senior Unsecured Notes ratings at BBB, all with Stable trends. The ratings primarily reflect Stantec’s strong investment-grade business risk profile and improved investment-grade financial risk profile. The Company has a number of robust, structurally sustainable business strengths and operates in a well-diversified set of subsectors as a globally ranked pure-play engineering design firm. Stantec’s reputation as a global leader in the water and sewage engineering design subsectors and its strong brand recognition in these service lines underscore the Company’s core operational strength. Stantec has a demonstrably loyal customer base with very little turnover among its most important clients. With over half of its revenues from variable fee contracts, the risk associated with its contractual arrangements is relatively low, and its focus on smaller and medium-sized projects from many thousands of customers reduces the lumpiness of its ongoing business activity. The Company remains one of the most profitable firms among its peer group. Stantec’s geographic exposure remains somewhat concentrated, with its focus on North America. In determining the rating, DBRS Morningstar also considered the Company’s overall market position, which does not place it among the sector’s global leaders in aggregate terms.

While revenues, earnings, and cash flows were affected by the Coronavirus Disease (COVID-19) pandemic, the global engineering design sector was relatively unscathed, and Stantec was no exception. Only modest operational performance declines were observed. Net revenues declined to $3.6 billion in the last 12 months ended June 2021 compared with $3.7 billion in 2019. EBITDA weakened to $559 million from $575 million over the same period. Despite these dynamics, financial metrics actually improved over this time frame because of significant debt reduction from internally generated funds. Ultimately, key financial risk metrics improved further into the investment-grade range.

Over the next 12 months, DBRS Morningstar anticipates modest improvements in the business risk profile primarily from acquisition activity as well as through organic growth. That said, the Company’s business risk profile is already strong; therefore, modest acquisition activity would not be likely to have a significant impact on the business risk profile.

Over the next 12 months, DBRS Morningstar continues to expect financial metrics to remain supportive of the rating. Acquisition activity could temporarily weaken metrics, but the Company’s ability to generate substantial annual free cash flows, coupled with its demonstrated commitment to a conservative financial profile, suggest that even significant acquisitions would be unlikely to affect the long-term underlying financial health of the firm.

While a positive rating change is not foreseen in the near term, over time, if the Company were to significantly improve its global diversification outside of North America and improve its global market position without weakening its financial risk profile, DBRS Morningstar may consider a positive rating action. On the other hand, a large and sustained increase in leverage could be viewed in a negative light. However, the Company’s business risk profile would likely benefit from a well-devised acquisition plan; therefore, this would also be taken into consideration. Overall, DBRS Morningstar is also not anticipating a negative rating action in the near term, either.

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/373262.

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

The principal methodologies are Rating Companies in the Services Industry (January 29, 2021; https://www.dbrsmorningstar.com/research/372947) and DBRS Morningstar Criteria: Guarantees and Other Forms of Support (May 31, 2021; https://www.dbrsmorningstar.com/research/379424), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar did have 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 info@dbrsmorningstar.com.