SNC-Lavalin Group

SNC-Lavalin Group (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 & maintenance. The firm serves clients in the resources, infrastructure, nuclear, engineering, and project management industries. 

Key highlights

• Foray in hydroelectric engineering in the US: Recently, the company has been awarded an engineering services contract for three hydroelectric projects from Rye Development, LLC to add powerhouses to the existing dam and lock facilities at each of the sites, which is owned by the US Army Corps of Engineers. This is the first contract of Hydroelectric engineering project for the company.

• Rise in net cash generated from operating activities: In FY2020, the company clocked CAD 122 million of cash from operating activities against net cash used in operating activities of CAD 355.3 million in 2019. The rise in operating cash flow was primarily due to healthy performance from SNCL Engineering Services.

Source: Company

• Steady order backlog: The Company’s revenue backlog decreased slightly to USD 13.2 billion as of December 31, 2020, compared with USD 14.1 billion in 2019, mainly reflecting a decrease in Infrastructure EPC Projects, Nuclear and Infrastructure Services, partially offset by an increase in EDPM. Furthermore, in 2021 the backlog is expected to be recognized in revenues for USD 4.4 billion and in 2022 for USD 2.0 billion. 

• Healthy liquidity: As of December 31, 2020, the company had cash and cash equivalents of USD 932.9 million, along with unused credit facilities of USD 2,394.7 million. Simultaneously, its net recourse debt to EBITDA ratio stood at 2.1x, below the required covenant level of 3.75, which is noteworthy.

Source: Company 

Financial overview of FY 2020

Source: Company

• In FY2020, the company reported revenues of CAD 7,007.5 million, against CAD 7,629.8 million in the previous corresponding period. The decline in revenue was primarily due to lower performance from SNCL Projects.
• The company reported an EBIT of CAD (292) million in FY2020, against an EBIT of CAD 2,968.6 million in the previous corresponding period. The higher SG&A expenses and lower gain from the disposal of capital investment were the main reasons behind negative EBIT.
• On the back of the above-discussed points, the company’s net loss stood at CAD 956.3 million in 2020, against a net profit of CAD 330.6 million in the previous corresponding period. 

Risks associated with investment

The Company's worldwide operations have been and would continue to be disrupted to varying degrees, mainly due to disruptions in the supply chains, project delays resulting from temporary or partial project shutdowns, and the Company's inability to continue or resume projects because of extended or complete project shutdowns. All these factors could impact the company's top line as well as the bottom line.

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

The Company’s Engineering Services business continued to deliver strong performance and the group significantly improved its operating cash flows in 2020. Segment Adjusted EBIT margins remained strong, while the backlog for EDPM business in Q42020 increased by 9% year-over-year, despite COVID-19. Furthermore, the company is expanding its operational reach as recently it forayed in hydroelectric engineering in the US. Moreover, the management expects its SNCL Engineering Services revenue to grow by a low single-digit percentage, compared to 2020, and Segment Adjusted EBIT to revenue ratio to be between 8% - 10% for 2021. Therefore, based on the above rationale and valuation, we recommend a “Buy” rating at the closing price of CAD 26.6 on March 29, 2021. We have considered Stantec Inc, Aecon Group Inc, Bird Construction Inc. etc. as the peer group for the comparison.

1-Year Price Chart (as on March 29, 2021). Source: Refinitiv (Thomson Reuters)

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