SNC-Lavalin Ends 2022 With Mixed Q4 Results

No-moat-rated SNC-Lavalin SNC ended 2022 with a mixed fourth quarter, as SNCL Services performed in line with management’s targets, but SNCL Projects posted more losses on lump-sum turnkey, or LSTK, projects. After rolling our model forward one year, we’ve maintained our CAD 35 fair value estimate, as our slightly more muted near-term revenue growth and operating margin expectations were offset by time value of money.

SNCL Services’ fourth-quarter organic revenue increased by 1.1% from the same period last year, driven by 2.3% growth in engineering services, 1.2% growth in nuclear, and 12.4% growth in operations & maintenance. Linxon organic revenue decreased by 17% year over year due to weaker results in Europe and Asia-Pacific. The segment posted an adjusted EBIT margin of 9% in the fourth quarter, consistent with our expectations. For full-year 2023, management expects SNCL Services to deliver organic revenue growth of 5%-7% and a segment adjusted EBIT margin of 8%-10%.

SNCL Projects reported a segment adjusted EBIT of negative CAD 150.2 million driven by losses on LSTK projects due to cost inflation, supply chain disruptions, and labor shortages. Two of the three remaining LSTK projects in Ontario (Eglinton and Trillium) are now largely physically complete, while REM is over 75% complete, and management said on the earnings call that it does not anticipate further material cost forecast revisions. The company expects net cash flows from operating activities to be negative in the first half of 2023 and turn positive in the second half of the year.

Management is conducting a strategic review of the portfolio, which includes Linxon. While continued losses on LSTK projects are frustrating and continue to weigh on the stock, we are encouraged by steady results in SNCL Services and believe that the firm’s risk profile will improve as the remaining LSTK projects near completion.