‘Red flag’: U.S. short seller targets WSP Global

A prominent U.S. short seller has targeted Montreal-based engineering firm WSP Global and believes its stock is overpriced upwards of 50 per cent.

Spruce Point Capital Management issued a “strong sell” position against WSP as it raised concerns about the “accuracy of its accounting choices and financial reporting, durability of its growth prospects, and sustainability of its extreme valuation multiple.”

Spruce Point also worries that WSP’s growth has been largely limited to acquisitions in recent years and will find it harder to find quality targets.

Ben Axler, founder and CIO of Spruce Point Capital Management, said WSP is showing “clear signs” of financial stress.

“They’re in a competitive space, they report margins that are astronomically higher than peers, which should be a red flag,” he told BNN Bloomberg in a television interview on Wednesday.

“We think they use a number of aggressive adjustments to embellish those numbers. The free cash flow we also think is embellished. Why? Because if you look carefully, they misclassified interest expense and then the acquisitions, I think they’re competing with other companies that are looking to roll up the industry.”

Axler called his position against WSP a “very high conviction short” as it is prepared to the position for multiple years if needed.

“The valuation of this company is the highest in the industry despite declining disclosure transparency, despite evidence of financial strains, large insider selling, difficulty finding employees and difficulty finding quality acquisition,” he said.

“When we look out and we put a short piece and put a price target, we’re looking out one year, two years, then we just expect this stock to go down and or significantly underperform the market. So we’re long the Canadian market as a hedge against WSP.”

WSP’s stock is down six per cent in early trading Wednesday but has historically been among the top-performing stocks on the Toronto Stock Exchange. As of Wednesday morning, Bloomberg data shows 13 of 16 analysts have it as a “buy” rating.

“We think the analysts are taking a lot of what management has to say at face value and haven’t done a deep forensic review of what the company is doing with their financial reporting with their accounting policies,” Axler said.

“It’s made a lot of money for shareholders in the past, but we’re forward-looking. We think investors should be looking out six, nine months, a year, two years to see what the prospects are and we think they’re dim.”

Axler said he hopes the report spurs WSP Global to shake up its board with more international members, as just 20 per cent of its business is in Canada.

“We want to see an independent investigation to review our concerns and we want to see a board shake-up and improvement with global independent board members that are not exclusively Montreal-based,” he said.

Spruce Point has had prior success in shorting Quebec-based companies, with previous shorts against Lightspeed and Nuvei declining more than 80 per cent since its report, while Saputo fell 25 per cent after its report.

“We’ve covered a number of Quebec and Canadian companies and frequently we find some of our best short targets to be highly acquisitive companies that are over-promoted, that we don’t feel fairly reflect the fundamental fair value and that are using aggressive financial reporting and accounting tactics to embellish results,” Axler said.

In an email to Bloomberg News Alain Michaud, the chief financial officer at WSP said the company is aware of the short-seller report. 

“While the report is being reviewed by our team, WSP upholds the highest levels of governance standards, and we take our obligations in this regard seriously.”

With files from Bloomberg News. 

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