Ouch – This Engineering Company Is Just Surviving Now…

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. SNC-Lavalin reports its results for Engineering and Construction or E&C (66% of 2019 revenues), and Professional Services & Project Management or PS&PM (34%). It caters to E&C clients across various markets like EDPM (41% of revenues), infrastructure (12%), nuclear (10%), and capital (3%). Capital is SNC-Lavalin’s investment, financing, and asset management arm. Its Project business comprises of Resources and infrastructure EPC projects. Resources segment provides a full suite of delivery services to the oil & gas and mining & metallurgy sectors.

By geography, the Americas is SNC’s largest market accounting for 51% of 2019 revenues, followed by Middle East & Africa (22%), Europe (22%), and Asia-Pacific (5%). SNC has a portfolio of 13 investments in four countries.

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 SNC 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. SNC 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 now constitute nearly 80% of the company’s total revenues. The balance 20% is derived from lump-sum turnkey construction contracts which the company is planning to completely exit in the near future as it is the main cause for its underperformance. SNC still has a backlog of $2.6 billion on infrastructure lump-sum turnkey construction contracts.

SNC’s leading presence in the North American infrastructure and transportation markets grants it large contracts that run for multiple decades. Its Nuclear and O&M have proven to be resilient in the latest quarter. SNC-Lavalin reported a net loss of $66 million and revenue declined by 6% YoY for the first quarter of 2020. The company is working towards reducing costs amid the pandemic and its impact on SNC’s worldwide operations.

SNC 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. It continues to win projects in its core geographies. SNC also won a number of diversified contracts across decommissioning, cleanup and a framework agreement to support an existing nuclear fleet.

On the engineering front, SNC witnessed a temporary dip in 407 traffic and temporary project suspensions. In relation to COVID-19 disruption, the company is protected by various contract clauses to a large extent. It also continues to invest in its digital future.

Dividends

SNC has an annual dividend yield of 0.35% and a very low payout ratio. The company had a sound track record of increasing dividends for the past 17 years till 2017. SNC, however, slashed its dividend by 65% in the last year and by 80% recently. The company reduced its dividend to $42.1 million in 2019 from $201.5 million in 2018 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 expecting a ramp-up in its EPS as a result of improving performance in its resources segment.

High investment-grade credit rating, clear capital allocation strategy, and strong diversified backlog worth ~$14 billion should aid future dividend growth. EDPM is further driving SNC’s digital future strategy. At the end of the first quarter, the company had $2.1 billion of cash and an additional $1 billion available to be drawn on the revolver credit facility. The company withdrew its 2020 financial guidance. Ownership of extensive assets, a century’s old experience, a large scale, and geographic footprint are SNC-Lavalin’s strong competitive advantages.

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 Inc., 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.

Bottom Line

With a tough earlier year in the background and challenges of the global pandemic, the going will not be 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. 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.