This opportunity just got even more interesting in my opinion.
So, amidst yesterday's market turmoil, SNC reported a quarter. It was absolutely fine -- revennue growth was above my (and everyone's) expectations, book/bill was fine. The issues were:
1) slightly lower than expected margins in the core services business due to higher SG&A. The SG&A was to support substantially higher bidding activity. And, they reiterated guidance for the year (which I think they will hit because revenues will just be better), and its a seasonally slow quarter anyway. The bottom line is that the business just has a lot more opportunity than they did and they are having to scale up some to address it.
2) They took a $20m charge in projects ($0.11/share). Essentially, as omicron continued to hit Canada in 1Q they had slightly worse absenteeism on their 2 issue projects than expected, and they widened their band for that variable going forward. In addition, war in Russia caused some input costs to rise. But importantly they continued to whittle down the total project backlog which is now under $1bn, and half of that is for the Quebec project that has no issues and a friendly client.
But, they didn't change their worst case scenario number at all, which I think is MORE than baked into the current stock price. In fact I think one could argue that $300m worst case scenario charges ($1.50 a share) are weighing on the stock to the tune of $15/share+
Well, on this $0.11 charge the stock lost $3/share. The market is obvioulsy capitalizing these losses at a big multiple, but they are on projects that are coming to an end effectively by the end of this year.
Inevitably, this issue will end and the market will start to value SNC Lavalin without these projects. I think the timeline for this is getting shorter and the upside is now close to 100%.