TD Q4/21 Analysis - BUY Q4/21: Healthy Engineering Services Result Offset by LSTK Losses
Event
Q4/21 adjusted PS&PM EBITDA was $4.9mm, well below consensus/TD at $124.0mm/$110.1mm. SNC also introduced its 2022 guidance that is consistent with the three-year targets introduced at its September 2021 Investor Day.
Impact: SLIGHTLY NEGATIVE
Overall, the composition of SNC's Q4/21 results was directionally in line with our expectations (i.e., another healthy quarter for SNCL Engineering Services vs. another challenging quarter for SNCL Projects). However, the level of adjusted EBIT loss incurred in SNCL Projects was far higher than expected, resulting in a significant Q4/21 consolidated adjusted EBITDA miss.
Reported SNCL Engineering Services adjusted EBIT was $237.4mm; however, results benefited from a $93mm recovery in EDPM. Ex-recovery, SNCL Engineering Services adjusted EBIT was $144.4mm vs. our $148.4mm estimate.
SNCL Projects generated an adjusted EBIT loss of $231.4mm vs. our $57.3mm loss forecast. The loss was mainly due to unfavourable cost reforecasts, primarily driven by COVID-19, supply-chain disruptions, inflation, and commissioning challenges (led to productivity losses, delays, and cost increases on remaining LSTK projects). Notably, SNC indicated that it believes the remaining potential for future additional financial risks, if any, to complete the company's LSTK projects should not exceed $300mm.
Outlook: Management is calling for SNCL Services y/y organic revenue growth of 4–6% and adjusted EBIT margin of 8–10%. Consolidated CFO is expected to be $0–$100mm.
We have made various adjustments to our model; however, our 2022 estimates are little changed. We have also introduced our 2023 estimates.
TD Investment Conclusion
We continue to be constructive on SNCL Services' outlook (SNC's future focus). Although LSTK project run-off risks remain, we see these risks as more than adequately priced into the stock. We continue to view SNC's valuation as compelling. We reiterate our Buy rating.