SNC-Lavalin Group Inc.

Transcription

1 SNC (T) $54.76 Stock Rating: Outperform (Unchanged) Target: $67.00 (Was $66.00) Risk Rating: Average (Unchanged) Est. Total Return 24% 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 10.4x 4.2x 3.8x P/E - core E&C 15.1x 11.1x 10.2x P/CFPS 77.9x 19.2x 11.7x Financial Data (as at Aug 30, 2016): Shares outstanding - Basic / FD (mln) / Market Capitalization (mln) $8,231.1 Enterprise Value (mln) 7,546.7 Cash (mln) $1,055.5 Debt (mln) - recourse $349.4 Net Cash (Debt) $706.1 BVPS / Price/Book $24.9/ 2.2x 2017E ROE 6.7% Dividend yield 2.0% 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. Maxim Sytchev, MSc - (416) maxim.sytchev@nbc.ca Adam Staszewski (416) adam.staszewski@nbc.ca NA March 2, 2017 SNC-Lavalin Group Inc. Q4/16 Results The NBF Daily Bulletin Engineering & Construction Putting context around what really matters EPS trajectory vs. peers + FCF generation HIGHLIGHTS Q4/16 was a beat ($0.49 vs. $0.43 on stronger oil & gas) but lots of questions re guidance. We believe investors have to take the company s disappointing vs. consensus 2017E guidance ($1.85 vs. $2.00 and our forecast of $1.76) in context of U.S. peers profitability trends (up from $0.40 in 2014 to $1.95 in 2018E for SNC vs. FLR (down) and JEC (flat Figure 1). In the lack of growth world and much more attractive valuation, we believe SNC stands out. Persistent lack of FCF generation is a past overhang and is now being removed as working capital intensity appears to wane (Figure 2). 5% dividend increase is also a nice add (2.0% yield). Conference call takeaways good tone. Expect doubling of mining backlog at Q1/17E to $600 mln off the bat. On M&A, the company is looking to strike the right balance between non-overlapping / under-penetrated geographies, adding capabilities and fixed-price vs. cost reimbursable (55%/45% split now). We prefer the latter (see our ideas re M&A here). Valuation & recommendation thesis is getting stronger, not weaker. Contrary to the initial reaction around guidance, when thinking that 2017E is a bidding year for SNC while still producing a 23% EPS growth at mid-point vs. 2016, 2018E visibility has only been enhanced (given bidding pipeline opportunity). We are very comfortable with the investment thesis here, especially at current multiples (11.1x 2017E P/E for SNC vs. FLR and JEC at 19.2x and 18.3x, respectively). With the shares lagging the TSX index YTD (-5.5% vs. +2.0%) amid the positioning of being long late-cycle names we believe investors will once again gravitate towards SNC. We just need several contract announcements for the market to re-engage with the story. We bumped our valuation on 407 ETR to $30.35 (from prior $29.04) on consistently stronger results. Our target price is therefore adjusted slightly to $67.00 (from prior $66.00). Outperform rating is unchanged. Stock Performance Daily SNC.TO (TOR) Line, SNC.TO, Trade Price(Last), , 54.90, +0.29, (+0.53%), SMA, SNC.TO, Trade Price(Last), 200, , Price CAD Vol, SNC.TO, Trade Price, , 166, Q1 16 Q Q Q Q Source: Reuters Auto Volume 500, ,181.0 Auto

2 Putting context around what really matters EPS trajectory vs. key peers + FCF generation Instead of rehashing a straight forward beat ($0.49 in core E&C EPS vs. Street at $0.43) in Q4/16 (function of Oil & Gas, Figure 3), we believe investors have to take the company s disappointing vs. consensus 2017E guidance ($1.85 vs. $2.00 and our forecast of $1.76) in context of U.S. peers profitability trends (all in local currencies and on adjusted / clean basis). SNC has been climbing from a deeper hole, granted. That being said, since the acquisition of Kentz in 2014, core EPS trajectory has improved from $0.40 to 2016 level of $1.61. We now project $1.95 in 2018E (unchanged post the quarter). Over the same time frame Fluor Corp. s (FLR: NYSE) EPS came down from $4.48 to consensus-projected $3.23 in 2018E; Jacobs Engineering Group Inc. (JEC: NYSE) earnings have been basically flat over the same time frame. In the lack of growth world and much more attractive valuation (11.1x 2017E P/E for SNC vs. FLR and JEC at 19.2x and 18.3x, respectively), we think that SNC s guide is fine. FIGURE 1: EPS trajectory SNC vs. Fluor and Jacobs Engineering (in local currencies) $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 $1.34 $1.51 $1.85 $1.94 $1.00 $0.50 $0.00 $ E * 2018E ** FLR JEC SNC ; * Mid-point management forecast; ** NBF for SNC; rest is company reports and consensus On the FCF front we admit that there is a certain amount of back-solving required in order to estimate the company s free cash flow. The biggest source of FCF drag since 2014 has been working capital and, depending on the year, lack of EBITDA generation (as was the case in 2014). Of importance, the working capital negative contribution amounted to only $60.7 mln in We project an increase in this metric in 2017E as new projects in a ramp-up mode require working capital. This dynamic should normalize in 2018E. Of importance, using the core E&C methodology, 2016 was FCF generative and we expect the company to build on this momentum this year and next. Lack of FCF generation has been the key fundamental pushback on the story. FIGURE 2: SNC Estimated FCF for core E&C it s coming back E 2018E Adjusted E&C EBITDA $152.8 $433.4 $371.9 $547.6 $ Core interest $67.6 $35.2 $24.1 $22.9 $ Core taxes -$22.7 $49.9 $3.3 $53.9 $ Core CAPEX $70.2 $116.0 $151.3 $173.5 $196.7 FCF before w orking capital $37.7 $232.3 $193.2 $297.4 $ / + Working capital $98.0 -$ $60.7 -$154.9 $60.7 FCF after working capital $ $411.9 $132.5 $142.6 $392.5 Shares outstanding (mln) FCF/sh $0.89 -$2.73 $0.88 $0.95 $2.61

3 Quick recap of Q4/16 good quarter The beat in the quarter was driven by oil & gas ($28 mln claw-back from negative cost reforecasts on two projects in the Middle East combined with more normalized margin overall for the division; Power also did better while Infra and Mining were lighter than modeled). FIGURE 3: SNC Q4/16 Actuals vs. Estimates ($000's, unless otherwise noted) Revenue NBF Actual Y/Y Actual vs. Q4/16A Q4/16E Q4/15A Grow th Estimates Comments Infrastructure & Construction $404,032 $431,966 $497, % -6.5% Completion of major projects Pow er 413, , , % -11.4% Completion of pow er line w ork Oil & Gas 1,013, ,206 1,217, % 7.8% Low er activity Mining & Metallurgy 71,409 90, , % -21.1% Difficult market conditions Operations & Maintenance 243, , , % 3.8% Capital 64,653 57,110 55, % 13.2% Divisional EBIT * 2,211,137 2,220,799 2,646, % -0.4% Consensus: $2,340mln Infrastructure & Construction 7,592 19,438 10, % -60.9% Increase in gross margin Pow er 32,057 28,910 31, % 10.9% SG&A decrease Oil & Gas 100,809 51, , % NM Reversal of negative reforcasts Mining & Metallurgy 2,847 4,072 15, % -30.1% Low er SG&A Operations & Maintenance 16,514 14,085 15, % 17.2% Capital 52,193 46,653 49, % 11.9% EBIT Margins 212, , , % 28.6% Infrastructure & Construction 1.9% 4.5% 2.1% Pow er 7.8% 6.2% 6.2% Oil & Gas 9.9% 5.5% 9.8% Mining & Metallurgy 4.0% 4.5% 12.4% Core E&C** 5.6% 3.7% 6.0% EPS - diluted, consolidated $0.77 $0.66 $ % 17.5% EPS - diluted, ex Capital Investments*** $0.49 $0.38 $ % 27.6% $0.43 *Corporate selling, G&A expenses no longer allocated to segment EBIT **Core E&C EBIT margin is adjusted to reflect corporate SG&A that is no longer allocated by segment ***Adjusted for amortization of intangibles related to Kentz, net gain on disposals, acquisition and integration charges and restructuring costs Of note (and as suggested in our First Look here), total backlog appears to be down $1.1 bln or 11% y/y and down 9% q/q. When comparing backlog from 2015 / 2016 in apples-to-apples terms, we have to recognize that $902.7 mln of the decline in backlog is related to the disposal of non-core E&C businesses that took place in 2016 ($131.9 mln of this was removed from the Infrastructure & Construction backlog; the rest is O&M as part of the maintenance business was sold as well). When adjusted for these items, backlog is down only 3% y/y and 2% q/q. Also of note, mining backlog is up 5% y/y and 56% q/q as the company won a major contract for the construction of two sulphuric acid plants in Latin America. Importantly, oil & gas backlog is also trending up, on y/y and q/q basis.

4 FIGURE 4: SNC Engineering backlog trajectory Q4/16A Total % of Total Q/Q Y/Y ($mm's, unless otherwise noted) backlog backlog change change Infrastructure & Construction 2, % -15% -31% Oil & Gas 3, % 7% 9% Pow er 2, % -10% 1% Mining & Metallurgy % 56% 5% Total Engineering Backlog 9, % -4% -8% Operations & Maintenance 1, % -33% -24% Total Backlog 10,677-9% -11% Disposal of non-core E&C business 903 Adjusted Total Backlog 11,580-2% -3% Conference call highlights mining backlog + M&A On the conference call, the overall tone was positive for SNC s operating segments. With 2017 being a "bidding" year, the company still expects EPS growth; meaning that when new projects begin to ramp up in 2018E it will more than backfill the forecasts in that year. In terms of M&A, the company s preference is leaning towards larger-scale acquisitions, with management commenting that buying one asset is preferable to three smaller tuck-ins (please refer to our note here on potential M&A size / target). While a new NCIB is not out of the question, management feels that currently, other capital deployment strategies would yield better returns for shareholders (note that SNC s last NCIB program was in 2015 where the company purchased 2.8 mln shares for $122 mln). Management also reiterated that smaller hard asset sales (ex 407) are still a 2017E event. More detail on the by-segment outlook is provided below. Infrastructure (18% of revenue): The infra segment in Canada remains a key area of growth, with the company shortlisted for major projects in Ontario and Quebec such as the George Massey bridge, Geordie Howe bridge, Finch West LRT and the Montreal LRT. Note that for the company to fully utilize the infra division, the company needs to win at least two major contracts in our view; with the funnel of infra-related opportunities this is not an unreasonable assumption. Mining and Metallurgy (3% of revenue): The tone from management was most positive for the Mining and Metallurgy division where SNC expects a sizeable contract award to take place in Q1/17E, which will likely double the current backlog of $294 mln. Power (19% of revenue): In the Power division, nuclear / renewable opportunities are expected to drive growth in 2017E (the company highlighted a recent pre-contract win for a Candu reactor in Argentina). Oil & Gas (46% of revenue): Even after excluding the favourable clawback of the reforecasts on two Middle East projects in Q3/16, Q4/16 EBIT margin of 7.1% was a welcome sign for the division. Management was pleased with the Q4/16 backlog replenishment in the division following the roll-off of the Gorgon project. Looking forward, management expects more EPC opportunities in the Middle East and the United States (likely also with legacy Valerus help). Change in estimates slightly higher in 2017E, the rest remains intact We revised our model to include SNC Q4/16 results with no material changes to our prior estimates. Top line is unchanged for 2017E at $8.4 bln, while only falling slightly to $8.9 bln in 2018E from previous $9.0 bln. Core E&C EBITDA margin is unchanged at 6.8% / 6.9% in 2017E / 2018E. Our estimates still call for flattish revenue growth in 2017E, with (anticipated) Infrastructure growth momentum driving the 7.1% pickup in revenue for 2018E.

5 FIGURE 4: SNC Change in estimates NBF New Estimates NBF Old Estimates ($mln's, unless otherwise noted) 2017E 2018E 2017E 2018E Revenue $8,353 $8,944 $8,349 $9,045 Core E&C EBITDA $547.6 $604.2 $555.3 $610.6 Core E&C margin 6.8% 6.9% 6.8% 6.9% Core E&C EPS Valuation and recommendation thesis is getting stronger, not weaker Contrary to the initial reaction around guidance, when thinking that 2017E is a bidding year for SNC while still producing a 23% EPS growth at mid-point vs. 2016, 2018E visibility has only been enhanced. We are very comfortable with the investment thesis here, especially at current multiples of 11.1x 2017E P/E for SNC vs. FLR and JEC at 19.2x and 18.3x, respectively. With the shares lagging the TSX index YTD (-5.5% vs. +2.0%) amid the positioning of being long late-cycle names, we believe investors will once again gravitate towards the name. We just need several contract announcements for the market to re-engage with the story. Based on the company s commentary, some good size mining opportunities are expected to be added to Q1/17E backlog; that should be a good start on top of numerous infra projects the company has been short-listed for. We also bumped our valuation on 407 to $30.35 (from prior $29.04) on consistently stronger results. Our target price is therefore adjusted slightly to $67.00 (from prior $66.00). Outperform rating is unchanged. FIGURE 5: 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 $54.76 Potential appreciation - all-inclusive 24.7% FIGURE 6: E&C comps Local Target Dividend Total % Off 52- Market EPS P/E EBITDA ($mm) EV/EBITDA Ticker Rating Price Price Annual Yield Return wk High Cap ($mm) 2017E 2018E 2017E 2018E 2017E 2018E 2017E 2018E Canadian comps SNC-Lavalin Group Inc. (*) SNC.TO OP $54.76 $67.00 $ % 24% -9% $8,231 $2.85 $ x 10.2x $730.9 $ x 3.8x Aecon Group Inc. ARE.TO OP % 24% -21% x 12.5x x 5.7x Stuart Olson Inc SOX.TO UP % -9% -26% x 12.3x x 5.5x Stantec Inc STN.TO OP % 20% -8% 3, x 13.0x x 8.3x IBI Group Inc IBG.TO OP % 31% -9% x 12.1x x 7.6x WSP Global Inc. WSP.TO OP % 11% -3% 4, x 15.7x x 8.2x Bird Construction Inc BDT.TO OP % 38% -40% x 15.0x x 4.4x 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 -22% -60% x 8.1x x 3.8x Median 2.9% 22% -15% 16.9x 12.4x 6.7x 5.6x U.S. comps Fluor Corp FLR NR NA % NA -5% 7, x 17.2x , x 7.3x AECOM ACM NR NA % NA -9% 5, x 11.5x x 9.1x Jacobs Engineering Group Inc JEC NR NA % NA -10% 6, x 16.5x x 9.2x KBR Inc KBR NR NA % NA -16% 2, x 10.8x x 6.7x Tutor Perini Corp TPC NR NA % NA -6% 1, x 11.5x x 6.1x Tetra Tech Inc TTEK.O NR NA % NA -9% 2, x 16.2x x 10.1x Chicago Bridge & Iron Company NV CBI NR NA % NA -21% 3, x 7.2x x 5.9x Median 0.8% -9% 13.6x 11.5x 8.2x 7.3x International comps WorleyParsons Ltd WOR.AX NR NA % NA -4% 2, x 21.7x x 7.3x CIMIC Group Ltd CIM.AX NR NA % NA -6% 12, x 23.0x 1, , x 6.9x Amec Foster Wheeler PLC AMFW.L NR 4.47 NA % NA -29% 1, x 6.9x x 10.6x Tecnicas Reunidas SA TRE.MC NR NA % NA -7% 2, x 14.1x x 7.5x Acciona SA ANA.MC NR NA % NA 0% 4, x 15.4x 1, , x 7.9x Saipem SpA SPMI.MI NR 0.42 NA % NA -27% 4, x 18.2x 1, , x 6.3x Petrofac Ltd PFC.L NR 9.24 NA % NA -9% 3, x 10.2x x 7.4x Balfour Beatty PLC BALF.L NR 2.79 NA % NA -7% 1, x 11.9x x 11.5x Arcadis NV ARDS.AS NR NA % NA -24% 1, x 9.2x x 7.5x Median 2.8% -7% 16.8x 14.1x 7.8x 7.5x Source: NBF, Bloomberg, company reports; UP = Underperform; SP = Sector Perform; OP = Outperform

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7 ADDITIONAL COMPANY RELATED DISCLOSURES ARE 6,7 BDT FTT IBG 2,3,4,5,7 NOA 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.