Morningstar | SNC-Lavalin 2Q Results Reflect Efficiency Improvements; Maintaining Our FVE
We expect to maintain our CAD 61 fair value estimate for no-moat engineering and construction company SNC-Lavalin after the company reported solid second-quarter results. These results are a continuation of laudable growth and restructuring of the company's focus over the past several years. During this period, SNC has successfully reduced fixed costs, pruned its portfolio, and pursued value-accretive acquisitions. We think these transformative changes will be followed by stronger growth, especially following the successful acquisition of WS Atkins that was completed in mid-2017.SNC increased second-quarter adjusted EPS from E&C by 51% to of $0.65. Quarterly organic results for this traditionally late cycle business reflect troughing revenue with weakness in oil and gas as well as in thermal power, but bidding activity suggested an organic uptick is possible, as reflected by new project awards. The company announced an impressive backlog of CAD 15 billion, up from CAD 13.5 billion in the previous quarter. SNC was also ranked as the third leading international design firm by magazine ENR, affirming the continued positive momentum supporting the firm.
Quarterly EBITDA margins were 7.7% for the E&C segment, up from 4.6% a year earlier. The nuclear segment also performed well, reporting a higher EBIT than a year earlier due to strong profitability and incremental revenue from the Atkins acquisition. The infrastructure segment reported a solid quarter as well, whereas Oil & Gas reported lower EBIT than in the year-ago quarter, although new awards in the Middle East should help maintain an EBIT margin in line with historical levels.
Following this quarter’s results, management maintained its full year adjusted EPS guidance. It expects companywide EPS between CAD 3.60-CAD 3.85, with a range of CAD 2.60-CAD 2.85 in E&C and CAD 1.00 from the Capital segment. If realized, this would compare favorably with an adjusted EPS of CAD 3.20 in 2017 and CAD 2.58 in 2016. Our full-year forecast is at the upper end of that range, reflecting our positive outlook for the company.
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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