SNC Lavalin stock

Should You Be Buying SNC Lavalin (TSE:SNC) Right Now?

SNC Lavalin stock

For even the best Canadian stocks available to the public, reputation and trust in management is always a driving factor in the markets. It can take years for companies to recover from a hit to their reputation or a breach of trust by management.

Over the years there have been many examples of once strong companies getting caught up in issues that led to pretty significant pullbacks in share prices. One recent notable example is SNC Lavalin (TSX:SNC) which got caught up in several scandals over the past few years.

We won’t go into the details of the issues as they got wide coverage and made national headlines worldwide. A simple search “SNC Lavalin scandal” will yield many results. Suffice to say, the company got caught in a multitude of issues (bribery, contract disputes, etc) and its reputation was severely damaged, and those who were buying this Canadian stock had their investment capital shaved in half.

SNC Lavalin (TSE:SNC) was a once blue-chip Canadian play

Only a few years ago, SNC Lavalin was one of the largest and most respected engineering and construction firms in the country – it also had a significant global presence. However, that was then, and this is now.

After reaching a peak of ~$60 per share in mid-2018, SNC’s Lavalin share price crashed to a low of $17 in just under a year. Fast forward to today, and the company is trading at $28.66 per share and remains far removed from its pre-scandal highs.

Strategic transformation incoming for SNC Lavalin

SNC Lavalin hasn’t stood still. It has aggressively disposed of assets as it re-invents itself. Under the guidance of a new CEO, the company is exiting the Lump-Sum Turnkey (LSTK) contracting business which was at the heart of many issues. While it will complete the projects in which it is committed, it will no longer bid on future LSTK contracts

By focusing on its engineering services, the company is effectively de-risking in an attempt to separate the new-look SNC Lavalin from the scandals of years past. The latest move was the sale of its oil & gas unit announced in late February.

According to the CEO, “selling the oil and gas business takes a big chunk (of risk) away, and we’re down to what I would call a manageable level of issues.”

At the same time, the company announced it was taking (and has since booked in Q4) $480M “charges, adjustments to provisions and claims receivable reductions, as well as a cost reassessment for the remaining Canadian LSTK Infrastructure projects”.

Now that the company has combed through its remaining projects, identified risks and took action, is it finally over? Well, the company still has $1.8B in LSTK contracts on the books, but management seems confident in the outlook of those projects.

SNC Lavalin stock is good value but it has much to prove

Market Cap: $4.98 billionForward P/E: 14.51Yield: 0.28%Dividend Growth Streak: 0 yearsPayout Ratio (Earnings): -1.45%Payout Ratio (Free Cash Flows): Premium Members OnlyPayout Ratio (Operating Cash Flows): Premium Members Only1 Yr Div Growth Rate: -66.67%5 Yr Div Growth Rate: Premium Members OnlyStocktrades Growth Score: Premium Members OnlyStocktrades Dividend Safety Score: Premium Members Only

How does one value the company? Given it is winding down the LSTK business, all eyes should be on the Engineering Services segment. In 2020, the segment booked 5.975B in revenue which was a slight decrease over the $6.017 it delivered in 2019.

SNC Lavalin announced it expects revenue to increase by the low single digits and for the adjusted EBIT ratio to come it between 8-10%. As of end of December, segment backlog stood at $10.9 billion, down from $11.1B in 2019.

As of writing, the company is trading at only 0.7 times sales. In comparison, peers are mostly trading between 1.2 and 1.5 times sales. However, current SNC Lavalin ratios include the legacy business. Let’s strip that out.

The company is trading at 0.83 times fiscal 2020 Engineering Services revenue and has an EV/EBIT of 11.08. Still a big discount to peers.  

Overall, I’d consider SNC Lavalin to be undervalued to fairly valued here. The discount to peers is warranted given its issues, and declining backlog is a concern. This is a prove me stock and management will need to re-establish SNC Lavalin as a reliable and trustworthy engineering partner.  

It’s doable, but certainly not an easy task.

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