SNC-Lavalin Group Inc.

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. The firm serves clients in the resources, infrastructure, nuclear, and engineering design and project management industries.

The management declared a cash dividend of CAD 0.02 per share, payable on August 14, 2020.

Key Updates:

• The Group is focusing on the strategic transformation of its Resources Business. The Group will focus on a service offering to a limited number of existing primary markets, that complement the Company's broader engineering services capabilities and strategy.

• The Company entered into an agreement to sell its South African Resources business to local management. The sale forms part of the Company's strategy to become a leading professional service and project management company and generate consistent earnings and cash flow.

Q2FY20 Financial Highlights: SNC declared its quarterly results, wherein the Company reported revenue of CAD 1,952.739 million, lower from CAD 2,284.177 million in the previous corresponding period (pcp). The decline was primarily attributed to a slide in income from all the segments, while a significant slide from resources segment took a toll on the Company's revenue. Direct costs of activities stood at CAD 1,943.145 million, considerably lower from CAD 2,399.334 million in Q2FY19. Corporate selling, general and administrative expenses stood slightly lower at CAD 18.132 million, as compared to CAD 19.808 million in pcp. Loss before income taxes stood lower at CAD 128.010 million, as compared to CAD 2,206.827 million in pcp, supported by lower amortization of intangible assets and absence of impairment of goodwill. The Company reported adjusted EBIT loss from Resources and Infrastructure EPC Projects, which dragged the profitability. The Company reported a net loss for the period at CAD 109.855 million, significantly lower than CAD 2,118.720 million in pcp.

Q2FY20 Income Statement Highlights (Source: Company Reports)

Key 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.

Valuation Methodology: EV to EBITDA Based (Illustrative)

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

Stock Recommendation: Irrespective of a challenging macro and an erosion of profitability, the stock soared ~23% in the last one year. We believe the company’s top-line is likely to remain under pressure due to the cancellation of several projects. Furthermore, the engineering sector looks topsy-turvy due to a tepid macros scenario. The company expect Engineering Services revenue for the second half of 2020 to decrease by a low to mid-single-digit percentage, and Segment Adjusted EBIT margin is expected to be between 8% and 10%. Further, the group’s order backlog continued to decline in the second quarter as well. The resource segment continues to drag the company’s performance, which is an area of concern. However, the group is focusing on restructuring this segment and expect it to turn profitable in 2021. We expect the current challenging factors are likely to persist in the foreseeable future, and we prefer to remain on the sidelines. Meanwhile, amidst the ongoing glitch in the broader economy and a challenging performance of the business, the company paid consistent dividends in the recent past, which is commendable. We have valued the stock using the EV to EBITDA based relative valuation approach and arrived at a target price, which suggests a single-digit downside potential (in % terms). For the said purpose, we have considered industry (industrial) median on NTM basis. Hence, considering the aforesaid facts, current price movement, we recommend a ‘Watch’ stance on the stock at the closing market price of CAD 22.06 on August 04, 2020.

SNC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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