Morningstar | SNC 3Q Results Consistent With Our Expectations but Concerns Over Corruption Allegations Remain
We are maintaining our CAD 51 fair value estimate for no-moat engineering and construction firm SNC-Lavalin after the company announced third-quarter results that were roughly in line with our expectations. Management’s guidance EPS range of CAD 2.60-2.85 for the full-year 2018 is also consistent with our prior projections.Third-quarter revenue was approximately 2.6% down from the same period last year, largely due to a roughly 22% decrease in oil & gas sales. The thermal power segment was also a drag on performance due to a large drop in revenue and a negative operating margin, as the company is currently exiting the business. Despite 70% growth in revenue, mining, and metallurgy posted a CAD 3 million loss due to project delays and timing of change order settlements.
On the bright side, infrastructure and engineering design & project management sales were up 21% and 10% year over year, respectively. Furthermore, the company improved its EBITDA margin by 130 basis points year over year. Management also announced that SNC-Lavalin delivered $124 million of cost synergies from the 2017 acquisition of Atkins.
Overall, nothing in the third-quarter results alters our long-term projections for SNC-Lavalin. We remain concerned about the bribery and corruption charges against former employees related to projects in Libya, as a ruling against SNC-Lavalin could disbar the company from bidding on Canadian government projects for a period of 10 years. The preliminary inquiry commenced on Oct. 29 and is scheduled to continue until the end of November. Until the market receives more clarity on the outcome of the case, we expect the corruption charges will continue to weigh down the stock price.
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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