We were patient with SNC-Lavalin. But now we’ve lost confidence in this engineering and construction stock. As a result, we’ve removed it from our list of Key stocks and now rate it a sell.
We’ve lost confidence in Montreal-headquartered global engineering and construction stock SNC-Lavalin Group (TSX—SNC). So we’ve removed it from our list of Key stocks. SNC is now a ‘sell’.
After slashing its dividend by nearly two-thirds, to 40 cents a share, SNC is not a buy for income. Nor is it a buy for long-term share price gains: some of its core businesses are troubled; SNC may face a long, costly and distracting legal battle; and it’s the focus of a political storm in Ottawa.
Investors took exception to SNC’s first-quarter loss. This caused its shares to fall by 13 per cent, the day the results were released. While the consensus estimate had called for the company to deliver adjusted earnings of 33 cents a share, it actually lost eight cents a share. We, too, took exception to this first-quarter loss.
SNC lost money in the first quarter
For the three months to March 31, SNC’s engineering and construction business (E&C) lost an adjusted $14.9 million, or eight cents a share. This was a turnaround from a profit of $89.5 million, or 51 cents a share, a year earlier. The decrease was largely caused by negative EBIT (Earnings Before Interest and Taxes) at the resources segment and lower EBIT at the infrastructure and nuclear segments.
At the resources segment, EBIT was negative $61.4 million, compared with a positive $52.3 million. The decline reflected less oil and gas activity and lower profitability due to unfavourable re-forecasts on certain projects and a delay in claims settlements.
Despite the disappointing first-quarter results, management remains confident that it can deliver on its original 2019 outlook, which calls for adjusted earnings of $2.00 to $2.20 a share. But we’re skeptical that SNC will be able to achieve its outlook. We think that the earnings per share of the E&C business are more likely to be $1.92 a share this year.
Selling off the jewelry
SNC sold part of its stake in Ontario’s Highway 407 express toll route. It still owns 6.76 per cent. Taken together with its other concessions, the value of these assets is about $13 a share. Subtract this figure from the stock’s current $27.83 share price and you’re left with $14.83 for the E&C business. This trades at just 7.7 times the $1.92 a share estimate.
But, despite the compelling valuation which gives the stock wide recovery potential, its price could remain depressed unless SNC can consistently improve its financial results and resolve the problems caused by the previous management team.
SNC has exhausted our patience. Sell.
This is an edited version of an article that was originally published for subscribers in the May 17, 2019, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
The Investment Reporter, MPL Communications Inc.
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