SNC-Lavalin in surviving mode

SNC-Lavalin is a fully integrated professional services and project management company. It is Canada’s largest engineering and construction company by revenue and employees. 

The company has a worldwide presence in over 50 countries providing comprehensive end-to-end project solutions starting right from designing, engineering, construction management, to operations and maintenance. Its reportable segments are EDPM (53% of revenues), infrastructure (30%), nuclear (13%), resources (2%) and capital (2%). Capital is SNC-Lavalin’s investment, financing, and asset management arm while its Project business comprises Resources and infrastructure EPC projects. 

By geography, the Americas is SNC’s largest market accounting for 51% of 2020 revenues, followed by Middle East & Africa (11%), Europe (33%), and Asia-Pacific (5%). SNC has a portfolio of 17 investments in five countries.

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Investment Data
 

Revenue Growth & Market Exposure

With the reputation of a premier engineering solutions partner, clients trust SNC for delivering complex projects in time. A holistic presence across the entire lifespan of a project makes the company the preferred and convenient choice for clients and governments. Most of its businesses enjoy strong competitive advantages and leadership positions in highly attractive end markets.

More than 70% of its revenue comes from blue-chip customers in the oil and gas industry, while its infrastructure business is a leader in the Canadian PPP projects. The engineering firm has been building long-lasting relationships with its partners, including governments and public and private companies, and suppliers since 1911. A leading position in engineering, procurement, and design often results in SNC-Lavalin winning significant global contracts in various sectors.

SNC-Lavalin has a diversified business across engineering services in essential sectors such as infrastructure, transport, and nuclear. The company derives its E&C revenues from reimbursable and engineering service contracts and EPC fixed-price contracts. It is focusing on strengthening its foothold in the reimbursable and engineering services contracts as well as standardized EPC contracts which together constitute more than 80% of the company’s total revenues.

The lump-sum turnkey construction (LSTK) contracts now constitute only 11% of total revenues declining from 20% in the last year. The company plans to completely exit this segment in the near future and is making progress in this regard. SNC has almost divested its Resources business which is a huge milestone in its strategy. But it will continue to retain its Mining & Metallurgy Services business.

The company’s other strategic priorities include driving consistent performance in Engineering Services and enhancing organic growth by leveraging technology and current capabilities. SNC’s leading presence in the North American infrastructure and transportation markets grants it large contracts that run for multiple decades and continues to win projects in its core geographies.

The engineering firm stands a good chance to benefit from crucial projects and infrastructure that are put in place to ensure a positive recovery. The company has many opportunities for expansion in core services, including cybersecurity, defense, innovative housing solutions across the regions. 

In relation to COVID-19 disruption, SNC remained protected by various contract clauses to a large extent. The company recorded bookings of $1.7 billion and ended the last quarter with a backlog of $11.1 billion. SNC is expecting revenue for 2021 to grow in a low single-digit range and the adjusted EBIT to revenue ratio of 8%-10%. Its Engineering Services business continues to benefit from a diversified business model, long-term client relationships, and a strong public sector focus.

Dividends

SNC has a very low annual dividend yield of 0.24% and a payout ratio of 100%. The company had a sound track record of increasing dividends for the past 17 years till 2017. The company, however, slashed its dividend by 65% in 2019 and later again by 80%. The company reduced its dividend in order to deleverage and strengthen its balance sheet. The dividend now stands at two cents per share from 10 cents per share earlier. SNC has paid quarterly dividends for 30 consecutive years.

As a result of unexpected operational setbacks that SNC faced in 2018, the company is undertaking measures to strengthen its balance sheet and build additional flexibility in order to maximize long-term shareholders’ returns. Its focus on lowering its EPC fixed-price contracts’ proportion should further improve its risk profile. SNC is making good progress on de-risking its business and generating consistent earnings and cash flow.

High investment-grade credit rating, clear capital allocation strategy, and strong diversified backlog worth ~$11 billion should aid future dividend growth. EDPM is further driving the business’ digital future strategy. The divestiture of the Resources Oil & Gas business announced in February 2021 will reduce its risk profile, and also accelerate its transition to becoming a leading provider of professional engineering services and project management solutions. Ownership of extensive assets, a century’s old experience, a large scale, and geographic footprint are SNC-Lavalin’s strong competitive advantages.

SNC Yield 2021
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Competition

SNC-Lavalin operates in highly competitive markets both in Canada and internationally. It faces competition from large, mid-size as well as smaller companies. It competes with the likes of Stantec, which is a leading global design and consulting firm ranking No.3 in North America and 10th globally. SNC also competes with Aecon Group, Badger Daylighting, Bird Construction, WSP Global, etc. Key differentiators for SNC include its world-class expertise, scale, and technology capability.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:WSPWSPWSP Global Inc.IndustrialsEngineering & Construction0.28135.8916.2943.5443.543.440.01101.100.479541.500.011031DurableNONONONOCanada1
TSE:STNSTNStantec Inc.IndustrialsEngineering & Construction0.5353.676.0132.9832.982.240.01231.230.383140.660.086665DurableNONOYESNOCanada1
TSE:SNCSNCSNC - LAVALIN GROUP INC.IndustrialsEngineering & Construction0.1032.535.610.000.00-1.600.00250.250.000040.080.002500DurableNONONONOCanada1
TSE:BDGIBDGIBadger Daylighting LtdIndustrialsEngineering & Construction0.4037.041.31272.11272.110.130.01701.704.4079120.630.053344DurableNONOYESNOCanada1
TSE:AREAREAecon Group IncIndustrialsEngineering & Construction0.5417.651.0816.8316.831.040.03973.970.472540.700.125444DurableNONOYESNOCanada1
TSE:BDTBDTBird Construction Inc.IndustrialsEngineering & Construction0.428.740.4710.1910.190.850.04464.460.4927120.390.044614DurableNONONONOCanada1

Bottom Line

With a tough year in the background and challenges of the global pandemic, the going was not easy for SNC-Lavalin. As engineering and technology changes continue to drive the world, SNC should benefit from its expertise in designing, developing, and executing solutions to address these transformations. Infrastructure planning and engineering will be key to restoring countries as they open up.

The company has continued to simplify its business and focus on its core markets, which should support the growth of its businesses. SNC’s focus on a more stable business model revolving around engineering services, highly diversified revenue by region, activity, and industry sector, strong backlog with tier 1 clients, and a resilient business model should support future dividend hikes.

SNC vs TSX vs SP500 2021
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SNC Yield 2021 1
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