Globe - analyst reactions “Strong” first-quarter results and a lack of of lump-sum turnkey project surprises from SNC-Lavalin Group Inc. (SNC-T) is “boosting investor sentiment,” according to Desjardins Securities’ Benoit Poirier.
While the Montreal-based integrated professional services and project management firm is best-performing stock in his coverage universe, up 50.4 per cent year-to-date, he thinks its first-quarter execution “provides an interesting entry point as SNC is still trading at a 5 times 2024 EBITDA discount to [peers] WSP and STN.”
“We could see this gap narrow when the LSTK backlog is completed, given the attractiveness of the engineering sector,” said Mr. Poirier.
He was one of several equity analysts on the Street to hike their forecast and target price for SNC following its premarket quarterly release on Tuesday, which sent its shares soaring 12.2 per cent.
“We see significant potential for value creation if SNC can successfully demonstrate the FCF generation potential of its Engineering Services business,” he said.
SNC reported total revenue of $2.023-billion, up 7 per cent year-over-year and above Mr. Poirier’s $1.834-billion estimate. Adjusted earnings per share jumped 34 per cent to 33 cents, topping the analyst’s 26-cent estimate.
“The core Engineering Services business is performing well above expectations — guidance for SNCL Services poised for upward revisions,” said Mr. Poirier. “The most impressive performance in the SNCL Services segment came from Engineering Services, which is off to an excellent start and reported a 17.5-per-cent increase in organic growth for 1Q23, with revenue of $1.344-billion, above our forecast of $1.218-billion. The revenue growth did not come from one particular project but, rather, was driven by a combination of the U.S., the UK, the Middle East and increased volume in Mining & Metallurgy. Management successfully added 1,000 employees in 1Q23, a key driver of organic growth.”
“LSTK backlog decreased sequentially to $0.5-billion and operating loss of $9-million is in line with management’s cost target. Commissioning and testing for the two Ontario projects are on track (largely physically completed) and the REM is progressing well (75-per-cent complete at the end of March). By the end of 2023, we estimate that the Infrastructure LSTK backlog will have been significantly reduced (we forecast $284-million vs $518-million currently) — a clear driver to derisk the story.”
With increases to his forecast for the next two years, Mr. Poirier raised his target for SNC shares to $42 from $38. The average is $39.
Others making changes include:
* ATB Capital Markets’ Chris Murray to $44 from $38 with an “outperform” rating.
“SNC reported better-than-expected results, reflecting strong organic growth in Engineering Services combined with a moderating impact from Ontario-based LSTK projects,” said Mr. Murray. “Management highlighted a positive demand environment across core regions, with book-to-bill trends remaining firm (more than 1.0 times), which could support an upwards revision to organic growth guidance at Q2/23. SNC delivered strong results, highlighted by the consistency and margin profile delivered by Engineering Services, which we believe reflects the future of SNC and supports an upward re-rating closer to design peers.”
* Canaccord Genuity’s Yuri Lynk to $42 from $41 with a “buy” rating.
“We continue to view SNCL Services earnings power in the $2.00 per share range on a standalone basis, which supports long-term value potential in excess of our target,” said Mr. Lynk. “We expect much more predictable and higher bottom-line results, not unlike what we witnessed in Q1/2023, as the two money losing LSTK projects have reached physical completion. With an underlying FCF profile not unlike other professional services companies, we expect SNC to continue to close its valuation gap versus peers as it completes its exit from LSTK.”
* Raymond James’ Frederic Bastien to $40 from $37 with an “outperform” rating.
“The market sent shares of SNC-Lavalin up 12 per cent [Tuesday], after the firm delivered a clean quarter that topped expectations and was void of material LSTK cost reforecasts,” said Mr. Bastien. “While we are not yet convinced we have seen the last of these — after all, we have been disappointed in the past — we continue to see a compelling set-up for the stock given how strong the demand environment for engineering services is, and how hard WSP Global and Stantec have run versus SNC over a multi-year timeframe. The company may not be painted with the same high-quality brush as its Canadian peers for some time, but it is proving the better one to own year-to-date.”
* RBC’s Sabahat Khan to $45 from $39 with an “outperform” rating.
“Overall, SNC’s go-forward business (and the LSTK segment) generated good results for the quarter, which we believe sets up the company well for the remainder of the year. Looking ahead, we expect continued strength in the Engineering Services business, with investor focus shifting to organic and (eventually) inorganic opportunities for this platform,” said Mr. Khan.
* BMO’s Devin Dodge to $35 from $33 with an “outperform” rating.
* CIBC’s Jacob Bout to $36 from $31 with a “neutral” rating.