Post by
FabulousFabQc01 on May 17, 2021 10:20am
Desjardins raised target to C$44.00 (from 37$)
The Desjardins Takeaway We are very pleased with SNC’s 1Q results, which demonstrated solid execution at SNCL Engineering Services and an efficient rundown of the LSTK backlog. With the completion of the last Resources LSTK project in sight and the divestiture of the Oil & Gas business on track to close in 2Q, we believe investors should start revisiting SNC ahead of a potential re-rating in the latter part of 2021. Accordingly, we are reiterating our Buy rating, and have increased our target to C$44 (from C$37).
Highlights Bright outlook for SNCL Engineering Services. Management continues to expect SNCL Engineering Services revenue to increase in the low single digits in 2021 (consensus and our forecast was +3.0%), with an adjusted EBIT margin of 8–10% (consensus and our forecast was 9.1%). We are encouraged by the solid book-to-bill ratio of 1.15x reported by the segment in 1Q, which bodes well for the remainder of the year.
Sixth consecutive operating cash flow beat—management is positioning the business to start deploying capital toward growth in 2022. SNC reported cash flow from operations of C$6m, much better than our forecast of -C$184m, marking the sixth consecutive beat. Net recourse debt to EBITDA as per the company’s credit agreement was better than expected (1.8x vs 2.7x). We believe management’s strong focus on execution throughout the remainder of 2021 should ideally position the business to consider deploying capital toward M&A and/or share buybacks to unlock shareholder value—an important milestone in SNC’s transition as an engineering services company.
Upcoming investor day a catalyst for the story. Management expects to provide an update on its growth strategy (organic and inorganic) for the SNCL Engineering Services segment as well as its capital deployment strategy on September 28.
Valuation Increasing our target to C$44 (from C$37) on the back of the strong execution. We derive our target using a sum-of-the-parts model based on: (1) a 9.75x (was 8.25x) multiple on our 2022 adjusted core PS&PM EBITDA estimate of C$687m (C$30.54), and (2) a value for SNC’s capital portfolio of C$13.21.
Recommendation Reiterating our Buy rating. We expect a further re-rating as SNC delivers strong adjusted EBITDA and FCF, demonstrating the full potential of its Engineering Services business.