Morningstar | Another Challenging Quarter for SNC-Lavalin; Lowering Our Fair Value Estimate Slightly. See Updated Analyst Note from 03 May 2019
We lower our fair value estimate for SNC-Lavalin to CAD 35 from CAD 36 after the no-moat engineering and construction firm reported a CAD 0.10 IFRS loss per diluted share. The change in valuation is driven by less optimistic revenue growth and operating margin projections in our model.The first quarter of 2019 was challenging across the board. The resources segment posted a negative $61.4 million segment EBIT, caused by cost overruns as well as the diplomatic spat between Canada and Saudi Arabia that continues to affect the firm’s oil & gas business in the region. Segment EBIT in the infrastructure and nuclear segments decreased by roughly 77% and 65% year over year, respectively. The engineering, design, and project management segment was the lone bright spot, growing segment EBIT 9% from the same period last year.
Despite a dismal first quarter, management remains confident in its full-year 2019 adjusted EPS guidance range of CAD 3.00-CAD 3.20, and thinks it can achieve that target through cost reductions and exiting unprofitable businesses. SNC-Lavalin simplified its reporting structure from seven to four E&C segments and is implementing a cost-reduction plan that management expects to deliver cost savings of over CAD 100 million in 2019 and CAD 250 million annually thereafter. Furthermore, CEO Bruce announced that the firm will no longer bid on lump-sum EPC projects in the mining sector and that it will exit 15 countries where business is unprofitable. These moves should help staunch the bleeding, as cost overruns on a mining project led to massive charges in the fourth quarter of 2018.
While we view the 3-star rated shares as reasonably valued, given the uncertainty around the outcome of a court decision regarding bribery and corruption charges related to projects in Libya, we caution investors that headline risk remains high and we assign SNC-Lavalin a very high uncertainty rating.
SNC-Lavalin Group is an engineering and construction group, and is engaged in the ownership of infrastructure and in the provision of operations and maintenance services. Co.'s segments are: mining and metallurgy, which provide tailored solutions for projects in the aluminum, gold, copper product sectors, among others; oil and gas, which includes projects for oil and gas and resources companies; power, which includes projects and services in hydro, and nuclear and thermal power generation, among others; infrastructure, which include infrastructure & construction, and operations and maintenance; capital, which invest in equity or subordinated debt into projects for public services.
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