SNC-Lavalin Group Inc.

Transcription

1 SNC (T) $52.44 Stock Rating: Outperform (Unchanged) Target: $67.00 (Unchanged) Risk Rating: Average (Unchanged) Est. Total Return 30% Stock Data: 52-w eek High-Low (Canada) $ $ w eek High-Low (U.S.) NA Bloomberg/Reuters: Canada Bloomberg/Reuters: U.S. SNC CN / SNC - T (Year-End Dec 31) 2016E 2017E 2018E Revenue (mln) $8,471 $8,353 $8,944 EBITDA (mln) $455 $731 $791 EPS (FD) - core E&C $1.31 $1.80 $1.95 CFPS $0.70 $2.85 $4.66 Valuation EV/EBITDA - core E&C 8.8x 3.5x 3.2x P/E - core E&C 13.4x 9.8x 9.0x P/CFPS 74.6x 18.4x 11.2x Financial Data (as at Dec 31, 2016): Shares outstanding - Basic / FD (mln) / Market Capitalization (mln) $7,882.4 Enterprise Value (mln) 7,570.8 Cash (mln) $1,055.5 Debt (mln) - recourse $349.4 Net Cash (Debt) $706.1 BVPS / Price/Book $25.9/ 2.0x 2017E ROE 6.7% Dividend yield 2.1% Industry Rating: Overweight (NBF Economics & Strategy Group) Company Profile: SNC-Lavalin is the largest Canadian E&C company (56% of top line from abroad) with ownership of 1 key concession 407 ETR (toll road in Toronto, 16.7% interest) in addition to some smaller hard assets. NA March 23, 2017 SNC-Lavalin Group Inc. Project update The NBF Daily Bulletin Engineering & Construction Deep dive on Champlain bridge; are there any issues? HIGHLIGHTS News sources from a local QC newspaper are pointing to potential delays; who could be responsible? On March 2 Le Devoir, a Montreal-based newspaper, published an article detailing potential delays with the construction of the Champlain bridge (original French version can be found here). The magnitude of a delay, according to the newspaper, is three months and is driven by the change in tonnage requirements that limit the weight of truck deliveries (steel, cement, pre-assembled pieces of the bridge), impacting the schedule as a result. Of interest, SNC-Lavalin hosted a Q4/16 conference call on the same day, suggesting that all major projects in the Infra division are progressing well. In the report we provide additional colour on how a potential delay / cost inefficiencies could impact the project deliverables and more importantly, who would be responsible for it as the tonnage issue came up AFTER the original P3 project was signed. Having gone through the project agreement between the consortium and the Federal government (and also basing on some additional commentary from Le Devoir), we believe a Latent Defect clause could be applied in this case, shielding SNC and the consortium members as a result. Valuation and recommendation - market is imputing an either a very dilutive M&A deal (as discussed Here) or a profit collapse; hard to believe either scenario. M&A overhang and the Champlain newsflow (which we believe is not well known to the Street) are compressing SNC s valuation in the process. In order to trade in line to U.S. peers (i.e., at 22.0x+) on 2017E core EPS, the market is telling us that SNC will produce an EPS of $0.80 instead of the $1.85 mid-point guidance. Even if the Champlain bridge is three months too late, with $400K/day penalty (split across ALL members), we would see a $36 mln ($400K for 90 days) negative impact (or $0.24/sh pre-tax). We rate SNC Outperform, $67.00 target. Stock Performance Daily /SNC.TO (TOR) Line, /SNC.TO, , 52.44, +0.08, (+0.15%), SMA, /SNC.TO, , 53.73, WMA, /SNC.TO, , Price CAD Maxim Sytchev, MSc - (416) maxim.sytchev@nbc.ca Adam Staszewski (416) adam.staszewski@nbc.ca Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Q Q Q Q Q Source: Reuters

2 Deep dive on Champlain - what is happening with the project? On March 2 Le Devoir, a Montreal-based newspaper, published an article detailing potential delays with the construction of the Champlain bridge (original French version can be found here). Recall that Saint-Laurent Group (SSL) consortium was awarded a fixed-price construction joint venture worth $2.15 bln in June 2015, of which SNC is a 50% partner (the other members of the consortium include ACS, Hochtief, Flatiron, Dragados, MMM Group, TY Lin International and International Bridge Technologies Canada). Construction began in the summer of 2015 and has a hard deadline of Dec. 1, The consortium will also maintain and operate the bridge for a 30-year concession until October The magnitude of a delay, according to the newspaper, is three months and is driven by the change in tonnage requirements that limit the weight of truck deliveries (steel, cement, pre-assembled pieces of the bridge), impacting the schedule as a result. More specifically, all the assembled pieces have to come from the South Shore (hence the legacy Champlain structure is impossible to avoid) as coming through the city is simply impossible given that most pieces are overweight and can extend as long as 35 metres in length. Please note that the change had been implemented since October 2016 with the existing Champlain structure in such poor condition that overweight tonnage is not allowed on the bridge. Rail and barges are the alternative delivery options for the necessary construction material / pre-assembled structures. The consortium has been aware of this issue since August 2016 and adjusted the workflow accordingly. On March 3, the same newspaper published another article (see here) which stipulated that given the cost escalations as a result of a less efficient access to the building site, the consortium and the Federal government have started looking at which party should be held responsible for the changes. Please note that when the Champlain contract was awarded in 2015, the perilous state of the existing bridge was not known. Additionally, vs. the prior relatively inflexible remarks of Denis Lebel (former minister of infrastructure who suggested that the consortium is on the hook for any potential issues), his successor, Amarjeet Sohi, is less categorical (at least publicly). While the Federal government is seeking to maximize return for the taxpayers, there are certain mechanisms in place that would allow for negotiation of previously unforeseen by the consortium issues. Retracing the steps around Champlain bridge public commentary from SNC-Lavalin / other public sources. On March 2, 2017 the newchamplain.ca website posted that: Considering that new load limitations have been imposed on certain provincial and federal infrastructures over the past year, including notably the Turcot Interchange and the Champlain Bridge, we had to adapt our strategy to limit transportation by road, opting for greater use of marine and rail transport. The moment this situation was identified, we made every effort to minimize the impacts related to this logistical reorganization. We are working in collaboration with all stakeholders to find solutions. In addition, in August 2016, we held a technical briefing for the media, where we explained the challenges linked to transporting pieces requiring special permits. Please note that on March 2, 2017 SNC-Lavalin released its Q4/16 results (see the note Here) and on the conference call explicitly stated that (in infrastructure) major projects continue to progress well. What does the project agreement say? We scoured through several hundred pages of the Project Agreement between the Federal government (Minister of Public Works and Government Services) and the consortium and identified what we view as a relevant paragraph, whereby according to point 27.2 in the Project Agreement (Latent Defect Affecting the Legacy Structures), any defect in any component of the Legacy Structures existing at the commencement date or, in the case of overpass Main 2, on the date of which responsibility for such overpass is handed over to the Private Partner, and which could not be reasonably have been discovered or ascertained by a competent person acting in accordance with

3 Good Industry Practice as of the date the Private Partner carried out the relevant inspections on such structures. the Authority shall, upon acknowledgment of the existence of a Latent Defect or determination thereof pursuant to the Dispute Resolution Procedure, as soon as reasonably practicable. Given the fact that the tonnage issue arose as a result of the deteriorating conditions on the legacy structure (and imposed after the commencement of the project), we would be hard-pressed to see how the Federal government would not have to shoulder the delta that the consortium members are incurring now to move materials, pre-assembled pieces to site in a less efficient manner. What about Amec s nuclear business as a potential acquisition target for SNC-Lavalin? Before Wood Group approached Amec Foster Wheeler on March 12, 2017, Amec identified several non-core assets for divesture, including its nuclear business. The nuclear business is technology agnostic and generates 274 mln and 16 mln in revenue and operating profit. According to UK sell-side, the asset could be worth between $160 mln and $330 mln. As we stated previously, we believe there is no chance that SNC would interfere in the Wood-Amec tie-up for the entire entity of the latter, but might take a look at the nuclear business. From our perspective, this is not THE acquisition that SNC would be aiming for. Again, asset-light, consulting-type business model is what we believe SNC needs to ensure its long-term competitive positioning. Valuation and recommendation market is imputing an either very dilutive M&A deal (as discussed Here) or a profit collapse; hard to believe either scenario. Lump-sum project uncertainty is the reality of the E&C business model. As we previously suggested, acquiring greater consulting-only exposure is something that we believe would be beneficial to SNC s business model and by extension its trading multiples. M&A overhang and the Champlain newsflow (which we believe is not well known to the Street) are compressing SNC s valuation in the process. In order to trade in line to U.S. peers (i.e., at 22.0x) on 2017E core EPS, the market is telling us that SNC will produce an EPS of $0.80 instead of the $1.85 mid-point guidance. Even if the Champlain bridge is three months too late, with $400K/day penalty (split across ALL members), we would see a $36 mln ($400K for 90 days) negative impact (or $0.24/sh pre-tax). Estimating any cost inefficiencies that could be additional is difficult at the moment given the lack of tangible data points. We reiterate our Outperform rating on SNC-Lavalin shares and $67.00 price target. FIGURE 1: SNC NAV P/E multiple Core EPS Target 2010A 2011A 2012A 2013A 2014A 2015A 2016E 2017E 2018E 2018E Core EPS (ex concessions) 14.0x $2.33 $1.63 $1.01 -$0.88 -$1.74 $1.34 $1.31 $1.80 $1.95 $ ETR (DCF-derived, pre-tax) $30.35 Other concession investments (1.5x multiple to account for likely re-rating) $4.50 Net cash $5.00 SoTP $67.19 Current share price $52.44 Potential appreciation - all-inclusive 30.2% Source: NBF, company reports

4 FIGURE 2: E&C comps Local Target Dividend Total % Off 52- Market EPS P/E EBITDA ($mm) EV/EBITDA Ticker Rating Price Price Annual Yield Return w k High Cap (mm) 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E Canadian comps SNC-Lavalin Group Inc. (*) SNC.TO OP $52.44 $67.00 $ % 30% -14% $7,882 $2.85 $ x 9.0x $730.9 $ x 3.2x Aecon Group Inc. ARE.TO OP % 24% -12% x 13.4x x 6.0x Stuart Olson Inc SOX.TO UP % -17% -13% x 13.4x x 5.6x Stantec Inc STN.TO OP % 21% -9% 3, x 13.6x x 8.6x IBI Group Inc IBG.TO OP % 28% -9% x 9.2x x 7.5x WSP Global Inc. WSP.TO OP % 12% -4% 4, x 15.5x x 8.2x Bird Construction Inc BDT.TO OP % 23% -25% x 17.1x x 4.1x North American Energy Partners Inc NOA.TO R R R R R R R R R R R R R R R R Petrow est Corp PRW.TO SP NM NM -7% -61% x 6.8x x 3.5x Median 2.7% 22% -13% 17.8x 13.4x 7.1x 5.8x U.S. comps Fluor Corp FLR NR NA % NA 13% 7, x 20.3x x 6.9x AECOM ACM NR NA % NA 7% 5, x 13.4x x 8.7x Jacobs Engineering Group Inc JEC NR NA % NA 8% 6, x 19.6x x 8.8x KBR Inc KBR NR NA % NA -2% 1, x 12.5x x 6.2x Tutor Perini Corp TPC NR NA % NA 12% 1, x 12.8x x 5.8x Tetra Tech Inc TTEK.O NR NA % NA 11% 2, x 19.4x x 9.7x Chicago Bridge & Iron Company NV CBI NR NA % NA -3% 2, x 7.9x x 5.4x Median 0.7% 10% 16.0x 13.4x 7.7x 6.9x International comps WorleyParsons Ltd WOR.AX NR NA % NA -3% 2, x 27.1x x 9.6x CIMIC Group Ltd CIM.AX NR NA % NA -10% 11, x 26.8x 1, , x 8.5x Amec Foster Wheeler PLC AMFW.L NR 5.22 NA % NA -17% 2, x 10.3x x 9.9x Tecnicas Reunidas SA TRE.MC NR NA % NA -6% 2, x 14.0x x 7.2x Acciona SA ANA.MC NR NA % NA -2% 4, x 15.2x 1, , x 7.5x Saipem SpA SPMI.MI NR 0.40 NA % NA -30% 4, x 17.3x 1, , x 5.8x Petrofac Ltd PFC.L NR 9.12 NA % NA -7% 3, x 9.9x x 6.1x Balfour Beatty PLC BALF.L NR 2.68 NA % NA -10% 1, x 12.2x x 8.5x Arcadis NV ARDS.AS NR NA % NA -17% 1, x 10.1x x 7.5x Median 3.0% -10% 17.1x 14.0x 8.1x 7.5x (*) Trading multiples are adjusted for concession investments, EPS and EBITDA are consolidated numbers. Source: NBF, Bloomberg, company reports; UP = Underperform; SP = Sector Perform; OP = Outperform

5 DISCLOSURES: Ratings And What They Mean: PRIMARY STOCK RATING: NBF has a three-tiered rating system that is relative to the coverage universe of the particular analyst. Here is a brief description of each: Outperform The stock is expected to outperform the analyst s coverage universe over the next 12 months; Sector Perform The stock is projected to perform in line with the sector over the next 12 months; Underperform The stock is expected to underperform the sector over the next 12 months. SECONDARY STOCK RATING: Under Review Our analyst has withdrawn the rating because of insufficient information and is awaiting more information and/or clarification; Tender Our analyst is recommending that investors tender to a specific offering for the company s stock; Restricted Because of ongoing investment banking transactions or because of other circumstances, NBF policy and/or laws or regulations preclude our analyst from rating a company s stock. 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6 NBF quarterly ratings summary and the total ratings by month can be found on our website under Research and Analysis/Equities/About NBF Research/Quarterly Ratings Summary (link attached) The NBF Research Dissemination Policy is available on our website under Legal/Research Policy (link attached) Click on the following link to see the company specific disclosures Click on the following link to see National Bank Financial Markets Statement of Policies If a company specific disclosure is not found herein for a listed company, NBF at this time does not provide research coverage or stock rating for the company in question. ADDITIONAL COMPANY RELATED DISCLOSURES ARE 6,7 BDT FTT IBG 2,3,4,5,7 NOA 2,3,4,5,7 PRW SNC 6,7,10 SOX 6,7,10 STN 6,7 TIH WSP 6,7,10 LEGEND FOR COMPANY RELATED DISCLOSURES: 2 National Bank Financial Inc. has acted as an underwriter with respect to this issuer within the past 12 months. 3 National Bank Financial Inc. has provided investment banking services for this issuer within the past 12 months. 4 National Bank Financial Inc. or an affiliate has managed or co-managed a public offering of securities with respect to this issuer within the past 12 months. 5 National Bank Financial Inc. or an affiliate has received compensation for investment banking services from this issuer within the past 12 months. 6 National Bank Financial Inc. or an affiliate has a non-investment banking services related relationship during the past 12 months. 7 The issuer is a client, or was a client, of National Bank Financial Inc. or an affiliate within the past 12 months. 8 National Bank Financial Inc. or its affiliates expects to receive or intends to seek compensation for investment banking services from this issuer in the next 3 months. 9 As of the end of the month immediately preceding the date of publication of this research report (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), National Bank Financial Inc. or an affiliate beneficially own 1% or more of any class of common equity securities of this issuer. 10 National Bank Financial Inc. makes a market in the securities of this issuer, at the time of this report publication. 11 A partner, director, officer or research analyst involved in the preparation of this report has, during the preceding 12 months provided services to this issuer for remuneration other than normal course investment advisory or trade execution services. 12 A research analyst, associate or any other person (or a member of their household) directly involved in preparing this report has a financial interest in the securities of this issuer. 13 A partner, director, officer, employee or agent of National Bank Financial Inc., is an officer, director, employee of, or serves in any advisory capacity to the issuer. 14 A member of the Board of Directors of National Bank Financial Inc. is also a member of the Board of Directors or is an officer of this issuer. 15 A redacted draft version of this report has been shown to the issuer for fact checking purposes and changes may have been made to the report before publication.