SNC-Lavalin Earnings: We’re Encouraged by Progress in Reducing Lump-Sum Turnkey Project Backlog

We’ve raised our fair value estimate for no-moat-rated SNC-Lavalin SNC to CAD 37 from CAD 35 after the engineering and construction firm reported solid first-quarter results. SNCL Services is on track to reach management’s full-year targets, while SNCL Projects avoided major losses while making meaningful progress in reducing the remaining lump-sum turnkey, or LSTK, project backlog. We are encouraged by solid results in SNCL Services and believe that the firm’s risk profile will improve as it continues to work off the remaining LSTK project backlog.

SNCL Services grew its first-quarter organic revenue by 10.1% year over year, led by 17.5% organic revenue growth in engineering services. The segment delivered a segment adjusted EBIT margin of 8.5%, up by 90 basis points from the same period last year. Management reiterated its full-year 2023 outlook and continues to expect SNCL Services to deliver organic revenue growth of 5%-7% and a segment adjusted EBIT margin of 8%-10%. SNCL Services ended the quarter with a roughly CAD 12.1 backlog, up 8% year over year, which we believe positions the business for continued solid growth.

SNCL Projects reported a segment adjusted EBIT of negative CAD 9.2 million, significantly lower than the CAD 30.5 million loss in the prior-year period and the CAD 150.2 million loss in the fourth quarter. The company reduced its remaining LSTK backlog by CAD 167.6 million sequentially to CAD 517.9 million. Of the three remaining LSTK projects in Ontario, Eglinton and Trillium are largely physically complete while REM is over 75% complete. Management anticipates a relatively higher cash flow drag from LSTK projects in the second quarter than in the first quarter but continues to expect net cash flows from operating activities to turn positive in the second half of 2023.