SNC-Lavalin Group Inc. (TSX: SNC)  is a fully integrated professional services and project management firm that offers a wide range of services, including financing, consulting, engineering and construction, procurement, and operations and maintenance. 

Key Highlights:

• Increased revenues: During Q1FY22, the company reported an increase in the total revenue to CAD 1,888.07 million as compared to the total sales of CAD 1,819.73 million in Q1FY21. The revenue from the engineering services segment grew the most to CAD 1,138.21 million in the reported period (Q1FY22) when measured against the revenue of CAD 1,049.62 million in pcp. The engineering services sales were driven by the strong volumes in the core segment across USA, UK, and Canada.

• Recent contracts: The company was awarded the contract to provide professional engineering services for various selective bridges and highway construction projects across all regions of the Federal Highway Administration, covering the entire USA. The contract has a total worth of USD 230 million. The SNC was also awarded a four-year project management office and engineering design review services contract by The Saudi Electric Company and The Egyptian Electricity Transmission Corporation to support the Saudi-Egypt power grids project.

• Sequential improvement in the margins: In Q1FY22, the group reported increased revenues, which were on account of the strong volumes and improved prices, though the slight rise in the overall costs and expenses marginally offset the impact of revenues, resulting in the group of witness improved profit margins on a sequential basis.

Source: Refinitiv, Analysis by Kalkine Group

Risks associated with investment

The group is majorly exposed to the slowdown in the economic activity, declining CAPEX on account of rising interest rates, increase in the cost because of inflationary pressure, etc. The decline in the construction activity can reduce the order book which can adversely impact the overall revenues and margins.   

Financial overview of Q1FY22 (Expressed in thousands of CAD)

Source: Company Filing 

• The group reported a marginal increase in the total revenue of CAD 1,888.07 million in Q1FY22 as compared to CAD 1,819.73 million in Q1FY21. The revenue was majorly increased from the engineering services and Linxon, which were slightly offset by the lower sales from the LSTK project.

• During Q1FY22, the EBIT (earnings before interest and taxes) declined to CAD 51.45 million when measured against EBIT of CAD 103.46 million in pcp, majorly because of the higher direct cost of activities, and various other expenses.

• The group reported net income of CAD 21.87 million in Q1FY22, which is lower than the net income of CAD 73.98 million in Q1FY21.
  

Valuation Methodology (Illustrative): EV/ Sales based

Analysis by Kalkine Group

Stock Recommendation:

The company reported higher revenue of CAD 1,888.07 million during Q1FY22 as compared to the revenue of CAD 1,819.73 million in pcp, also the engineering services (which contributes to the majority of the total revenue) witnessed a surge in the sales to CAD 1,138.21 million in the same period (Q1FY22) against the sales of CAD 1,049.62 million in pcp. The group recently won two contracts, one from the Federal Highway Administration (FHWA) for the entire USA, to provide professional engineering services for selective highways and bridges. The other contract was from The Saudi Electric Company and The Egyptian Electricity Transmission Corporation to support the Saudi-Egypt power grids project, which will complete in four years. On the valuation front, the stock is measured on the EV/ Sales based relative valuation multiple, and the stock is offered at 0.7x as compared to the industry (industrials) median of 1.4x, stating the stock is undervalued. We have considered APi Group Corp., and Dycom Industries Inc. as the peer group for the comparison.

Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock of SNC at the last closing price of CAD 22.57 on June 20, 2022. Additionally, the markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

One-Year Technical Price Chart (as of June 20, 2022). Analysis by Kalkine Group

Note- The reference data has been partly sourced from REFINITV 

  Technical Analysis Summary

Disclaimer

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