New Rating!!!!! GLTALongsSNC-Lavalin Group Inc. (SNC-T) C$35.88 Q1/23 Results: All Around Solid Quarter
Event Q1/23 adj. PS&PM EBITDA was $156mm; above consensus of $144mm and our $152mm estimate. Results were ahead of expectations in both SNCL Services (SNC's go-forward focus business) and the LSTK Projects segment (which continues to be wound down). Adj. PS&PM EPS was $0.32 vs. consensus/TD at $0.25/$0.29. Impact: POSITIVE
SNCL Services continued to perform well, generating y/y organic revenue growth of 10.1% (ahead of SNC's 2023 organic growth guidance of 5%–7%) and an adj. EBIT margin of 8.5% (within SNC's 8%–10% target range). Meanwhile, LSTK Projects results were better than expected for the first time in many quarters, as management delivered on its target of keeping LSTK Projects' loss confined to overhead costs.
Q1/23 SNCL Services adj. EBIT was $156.3mm vs. consensus/TD at $145.8mm/$154.5mm. The Engineering Services segment generated very strong organic revenue growth (+17.5% y/y) and drove the SNCL Services adj. EBIT outperformance (Eng. Services adj. EBIT was $113.5mm vs. consensus/TD at $99.7mm/$105.0mm). Meanwhile, SNCL Services backlog reached a record high. LSTK Projects incurred an adj. EBIT loss of $9.2mm; better than the consensus expectation of a negative $16.2mm and our negative $16.5mm forecast. Q1/23 LSTK Projects backlog was $517.9mm (down ~24% q/q).
We have made relatively minor adjustments to our PS&PM forecast. That said, coming out of the Q1/23 release, given continued solid SNCL Services results, and tangible evidence of improved LSTK Projects performance, we see a strong argument in support of an expansion in SNC's valuation. To that end, we have increased our Eng. Services and Nuclear target valuation multiples. Our target price increases to $45.00 (was $38.00).
TD Investment Conclusion We remain constructive on SNCL Services' outlook, while we see remaining LSTK Projects run-off risks as more than adequately priced into the stock. We reiterate our BUY rating.