TD buy at $34 SNC-Lavalin Group Inc.
(SNC-T) C$23.44
Q3/22: Healthy SNCL Svcs. Results Offset by LSTK Projects Losses
Event
Q3/22 adj. PS&PM EBITDA was modestly below expectations, as healthy SNCL Services results were offset by further LSTK Projects segment losses.
SNC updated its 2022 SNCL Services outlook (now calling for slightly higher y/y organic revenue growth, while adj. EBIT margin range was narrowed). Meanwhile, management now expects 2022 net cash from operating activities (CFO) to be a loss of ~$300mm (previously between -$50mm and -$150mm).
Impact: SLIGHTLY NEGATIVE
Q3/22 adj. PS&PM EBITDA was $127.2mm; below consensus of $136.4mm and our $135.4mm estimate. Encouragingly, the SNCL Services business exhibited strong organic growth (+12.6% y/y) and healthy margins (adj. EBIT margin 9.3%). However, SNC recognized further LSTK Projects segment losses (not materially higher vs. Q2/22, but still missed consensus/TD), while 2022 net CFO guidance was lowered (Q3/22 net CFO was negative $158.7mm).
Q3/22 SNCL Services adj. EBIT was $152.6mm (9.3% margin) vs. our $146.4mm (9.1% margin) estimate. SNCL Services organic revenue growth was supported by y/y organic growth of 18.3% in Engineering Services.
LSTK Projects generated an adj. EBIT loss of $43.9mm vs. consensus at negative $33.7mm and our negative $29.1mm forecast. SNC said that it has now recognized a cumulative $77mm of the previously disclosed $300mm of potential future additional financial risks to complete the LSTK projects (note, SNC reaffirmed its forecasted maximum additional potential financial losses related to the LSTK projects of $300mm).
Our 2022 estimates have declined (driven primarily by Q3/22's miss and higher- forecast losses in LSTK Projects), while our 2023 estimates are also modestly lower. Our target price has declined to $34.00 (was $35.00).
TD Investment Conclusion
We continue to be constructive on SNCL Services' outlook (SNC's future focus). Although LSTK Projects 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.