SNC reported weak 3Q20 results. Adjusted PS&PM core EBITDA was below Street expectations (C$73m vs consensus of C$130m; we expected C$50m) while PS&PM core adjusted EPS of -C$0.33 was also below consensus of C$0.18 and our forecast of -C$0.15. Consolidated revenue of C$2.0b was in line with consensus and our forecast of C$2.0b.
More importantly, SNC reported cash flow from operations of -C$136m, better than our forecast of -C$234m, marking the fourth consecutive beat. This was driven by solid results from SNCL Engineering Services, which generated C$186m of operating cash flow in 3Q. Consequently, the net recourse debt to EBITDA ratio as per the company’s credit agreement was better than expected (1.7x vs 2.0x).
The SNCL Engineering Services segment reported revenue of C$1.4b (-3.6% yoy; we expected C$1.4b) and adjusted EBIT excluding capital of C$142m, implying an adjusted EBIT margin of 9.8% (we expected 8.5%). On a segmented basis, Nuclear and Infrastructure Services generated robust adjusted EBIT margin of 16.1% (vs 15.2% expected) and 7.8% (vs 5.0% expected), respectively. Lastly, EDPM generated strong EBIT margin of 9.0% (vs 8.2% expected) and revenue growth of -7.0% (vs -6.0% expected).
The SNCL Projects segment reported revenue of C$0.5b (we expected C$0.5b) and adjusted EBIT of -C $100m (we expected -C$100m), mainly driven by a weak performance at Resources (adjusted EBIT of -C$75m vs -C$100m expected). The Infrastructure EPC segment reported an adjusted EBIT of -C$25m (vs our forecast of zero). SNC was able to reduce its LSTK backlog to C$2.1b currently from C$2.7b in 3Q. The company still expects to complete the vast majority of its Resources LSTK projects in 2020—a key milestone in terms of derisking the business.
In terms of the outlook, SNCL Engineering Services revenue is expected to decrease in the low- to midsingle- digit percentage range in 4Q20 (consensus was at -3.6% yoy), with adjusted EBIT margin of 8.5– 9.5% (consensus was 9.2%).
Overall, we expect investors to be disappointed by the continued LSTK losses and expect the stock to trade lower this morning. Nevertheless, our investment thesis on SNC is focused on the long-term valuecreation which should arise from the new strategic focus on engineering services; this has not changed with 3Q results as SNCL Engineering Services performed above expectations.