SNC-Lavalin Group Inc

SNC-Lavalin Group Inc. (TSX: SNC) is an integrated professional services and project management company which offers service like financing, consulting, engineering and construction, procurement, and operations and maintenance. The company clientele is diversified across the sectors including resources, infrastructure, nuclear, and engineering design and project management industries.

Recent Developments

• As on November 02, 2020, the corporation announced the appointment of Dale Clarke as President, Infrastructure Services, with immediate effect.
• Recently, the company confirmed the extension of Indefinite Delivery Indefinite Quantity contract to continue providing construction engineering and inspection (CEI) services by the Georgia Department of Transportation (GDOT). The value of the contract was proposed at ~USD 35 million.
• The board of directors have declared a quarterly dividend of CAD 0.02 per share, payable on November 27, 2020 to shareholders of record on November 13, 2020.

Q3FY20 Financial Highlights:

• SNC announced its third quarter results, wherein the company posted a lower revenue of CAD 2,005.732 million, as compared to CAD 2,432.163 million in the previous corresponding period (pcp). The decline was primarily attributable to considerable slide in income from SNCL projects and capital projects.
• The group reported CAD 1.4 billion of debt and CAD 0.4 billion of limited recourse debt as on September 30, 2020.
• Cash and cash equivalent stood at CAD 1.1 billion, while reported an additional of CAD 2 billion of revolving credit facility, which would support the company’s near-term requirement.
• The corporation reported a net loss of CAD 85.125 million, as compared to a net profit of CAD 2,756.714 million in Q3FY19.                                

Q3FY20 Income Statement and Segment Highlights (Source: Company Reports)

Risks: The majority of the revenue is derived from EDPM segment, which is undergoing through several challenges as clients are deferring or cancelling projects which might hinder the cash flow of the Company in the foreseeable future. Further, a sluggish economic environment is likely to weigh on the company’s backlog and financial performance.

Valuation Methodology: Price to CF Based (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation

The ~USD 35 million contracts from GDOT shows the business resilience, as the client is associated for more than 15 years and is a showcase of excellent customer service. However, the company expects the existing weakness in the construction and engineering segments to continue in the fourth quarter of FY20. Furthermore, the company reported comparatively lower backlog levels, as compared to the previous corresponding period, indicates lower revenue visibility in the coming days. We expect the current challenging dynamics to persist in the foreseeable future; hence, we prefer to remain on the sidelines. The stock of SNC fell ~36% so far this year. We have valued the stock using the Price to CF based relative valuation approach and arrived at a target price, which suggests a double-digit downside side potential (in % terms). For the said purpose, we have considered WSP Global Inc, Stantec Inc and Aecon Group etc., as a peer group. Hence, considering the aforesaid facts, current price movement, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 19.21 on November 03, 2020

1-Year Price Chart (as on November 03, 2020 after the market close). Source: Refinitiv (Thomson Reuters)

Disclaimer

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